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The following terms, abbreviations and acronyms are used to identify frequently used terms in this report: | |||||||||||
TERM | DEFINITION | ||||||||||
Adjusted Operating Income | Operating income excluding restructuring, depreciation and amortization and a goodwill impairment charge | ||||||||||
Adjusted Operating Margin | Adjusted Operating Income divided by revenue | ||||||||||
Amba | Amba Investment Services; a provider of investment research and quantitative analytics for global financial institutions; a subsidiary of the Company acquired 100% of Amba in December 2013. | ||||||||||
Americas | Represents countries within North and South America, excluding the U.S. | ||||||||||
AOCI | Accumulated other comprehensive income (loss); a separate component of shareholders’ equity (deficit); includes accumulated gains & losses on cash flow and net investment hedges, certain gains and losses relating to pension and other retirement benefits obligations and foreign currency translation adjustments. | ||||||||||
ASC | The FASB Accounting Standards Codification; the sole source of authoritative GAAP as of July 1, 2009 except for rules and interpretive releases of the SEC, which are also sources of authoritative GAAP for SEC registrants | ||||||||||
BlackBox | BlackBox Logic; a leading provider of Residential Mortgage-Backed securities loan level data. The Company acquired the customer base and products of BlackBox Logic in December 2015 | ||||||||||
Asia-Pacific | Represents countries in Asia also including but not limited to: Australia and its proximate islands, China, India, Indonesia, Japan, Korea, Malaysia, Singapore and Thailand | ||||||||||
ASU | The FASB Accounting Standards Updates to the ASC. It also provides background information for accounting guidance and the bases for conclusions on the changes in the ASC. ASUs are not considered authoritative until codified into the ASC | ||||||||||
BlackBox | BlackBox Logic; a leading provider of Residential Mortgage-Backed securities loan level data. The Company acquired the customer base and products of BlackBox Logic in December 2015 | ||||||||||
Board | The board of directors of the Company | ||||||||||
BPS | Basis points | ||||||||||
Canary Wharf Lease | Operating lease agreement entered into on February 6, 2008 for office space in London, England, occupied by the Company in the second half of 2009 | ||||||||||
CFG | Corporate finance group; an LOB of MIS | ||||||||||
CLO | Collateralized loan obligation | ||||||||||
CMBS | Commercial mortgage-backed securities; part of CREF | ||||||||||
Commission | European Commission | ||||||||||
Common Stock | The Company’s common stock | ||||||||||
Company | Moody’s Corporation and its subsidiaries; MCO; Moody’s | ||||||||||
Copal | Copal Partners; an acquisition completed in November 2011; part of the MA segment; leading provider of outsourced research and analytical services to institutional investors | ||||||||||
Copal Amba | Operating segment created in January 2014 that consists of all operations from Copal as well as the operations of Amba. The Copal Amba operating segment provides outsourced research and analytical services to the global financial and corporate sectors | ||||||||||
Council | Council of the European Union | ||||||||||
CP | Commercial paper | ||||||||||
CP Notes | Unsecured issued under the CP Program | ||||||||||
CP Program | A program entered into on August 3, 2016 allowing the Company to privately place CP up to a maximum of $1 billion for which the maturity may not exceed 397 days from the date of issue. | ||||||||||
CRAs | Credit rating agencies | ||||||||||
CRA3 | Regulation (EC) No 462/2013 of the European Parliament and of the Council, which updated the regulatory regimes imposing additional procedural requirements on CRAs | ||||||||||
CREF | Commercial real estate finance which includes REITs, commercial real estate collateralized debt obligations and CMBS; part of SFG | ||||||||||
CSI | CSI Global Education, Inc.; an acquisition completed in November 2010; part of the MA segment; a provider of financial learning, credentials, and certification in Canada | ||||||||||
CSPP | Corporate Sector Purchase Programme; quantitative easing program implemented by the ECB. This program allows the central bank to purchase bonds issued by European companies, as well as provide access to the secondary bond market in which existing corporate bonds trade. | ||||||||||
D&A | Depreciation & amortization | ||||||||||
D&B Business | Old D&B’s Dun & Bradstreet operating company | ||||||||||
DBPPs | Defined benefit pension plans | ||||||||||
DCF | Discounted cash flow; a fair value calculation methodology whereby future projected cash flows are discounted back to their present value | ||||||||||
Debt/EBITDA | Ratio of Total Debt to EBITDA | ||||||||||
Directors’ Plan | The 1998 Moody’s Corporation Non-Employee Directors’ Stock Incentive Plan | ||||||||||
Distribution Date | September 30, 2000; the date which Old D&B separated into two publicly traded companies – Moody’s Corporation and New D&B | ||||||||||
EBITDA | Earnings before interest, taxes, depreciation and amortization | ||||||||||
ECB | European Central Bank | ||||||||||
EMEA | Represents countries within Europe, the Middle East and Africa | ||||||||||
EPS | Earnings per share | ||||||||||
ERS | The enterprise risk solutions LOB within MA; offers risk management software products as well as software implementation services and related risk management advisory engagements | ||||||||||
ESMA | European Securities and Market Authority | ||||||||||
ESP | Estimated Selling Price; estimate of selling price, as defined in the ASC, at which the vendor would transact if the deliverable were sold by the vendor regularly on a stand-alone basis | ||||||||||
ESPP | The 1999 Moody’s Corporation Employee Stock Purchase Plan | ||||||||||
ETR | Effective tax rate | ||||||||||
Equilibrium | A leading provider of credit rating and research services in Peru and Panama; acquired by Moody’s in May 2015 | ||||||||||
EU | European Union | ||||||||||
EUR | Euros | ||||||||||
European Ratings Platform | Central credit ratings website administered by ESMA | ||||||||||
Excess Tax Benefit | The difference between the tax benefit realized at exercise of an option or delivery of a restricted share and the tax benefit recorded at the time that the option or restricted share is expensed under GAAP | ||||||||||
Exchange Act | The Securities Exchange Act of 1934, as amended | ||||||||||
FASB | Financial Accounting Standards Board | ||||||||||
FIG | Financial institutions group; an LOB of MIS | ||||||||||
Fitch | Fitch Ratings, a part of the Fitch Group | ||||||||||
Financial Reform Act | Dodd-Frank Wall Street Reform and Consumer Protection Act | ||||||||||
Free Cash Flow | Net cash provided by operating activities less cash paid for capital additions | ||||||||||
FSTC | Financial Services Training and Certifications; a reporting unit within the MA segment that includes on-line and classroom-based training services and CSI | ||||||||||
FX | Foreign exchange | ||||||||||
GAAP | U.S. Generally Accepted Accounting Principles | ||||||||||
GBP | British pounds | ||||||||||
GDP | Gross domestic product | ||||||||||
ICRA | ICRA Limited; a leading provider of credit ratings and research in India. The Company previously held 28.5% equity ownership and in June 2014, increased that ownership stake to just over 50% through the acquisition of additional shares | ||||||||||
ICRA Acquisition | The June 2014 purchase of an additional ownership interest in ICRA resulting in a majority ownership and consolidated of ICRAs financial statements; ICRAs results are consolidated into Moody’s financial statements on a three-month lag and accordingly the Company began including the results of operations for ICRA in its consolidated financial statements beginning in the fourth quarter of 2014 | ||||||||||
ICRA Gain | Gain relating to the step-acquisition of ICRA; U.S. GAAP requires the remeasurement to fair value of the previously held non-controlling shares upon obtaining a controlling interest in a step-acquisition. This remeasurement of the Company’s equity investment in ICRA to fair value resulted in a pre-tax gain of $102.8 million ($78.5 million after tax) in the second quarter of 2014 | ||||||||||
Intellectual Property | The Company’s intellectual property, including but not limited to proprietary information, trademarks, research, software tools and applications, models and methodologies, databases, domain names, and other proprietary materials | ||||||||||
IRS | Internal Revenue Service | ||||||||||
IT | Information technology | ||||||||||
KIS | Korea Investors Service, Inc.; a leading Korean rating agency and consolidated subsidiary of the Company | ||||||||||
KIS Pricing | Korea Investors Service Pricing, Inc.; a Korean provider of financial instruments pricing and consolidated subsidiary of the Company | ||||||||||
KIS Research | Korea Investors Service Research; a Korean provider of financial research and consolidated subsidiary of the Company | ||||||||||
Korea | Republic of South Korea | ||||||||||
Legacy Tax Matter(s) | Exposures to certain potential tax liabilities assumed in connection with the 2000 Distribution | ||||||||||
Lewtan | Lewtan Technologies; a leading provider of analytical tools and data for the global structured finance market; part of the RD&A LOB within MA; an acquisition completed in October 2014 | ||||||||||
LIBOR | London Interbank Offered Rate | ||||||||||
LOB | Line of Business | ||||||||||
MA | Moody’s Analytics – a reportable segment of MCO formed in January 2008 which provides a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets. | ||||||||||
M&A | Mergers and acquisitions | ||||||||||
Make Whole Amount | The prepayment penalty relating to the Series 2007-1 Notes, 2010 Senior Notes, 2012 Senior Notes, 2013 Senior Notes, 2014 Senior Notes (5-year), 2014 Senior Notes (30-year) and the 2015 Senior Notes; a premium based on the excess, if any, of the discounted value of the remaining scheduled payments over the prepaid principal | ||||||||||
MCO | Moody’s Corporation and its subsidiaries; the Company; Moody’s | ||||||||||
MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||||||
MIS | Moody’s Investors Service – a reportable segment of MCO; consists of five LOBs – SFG, CFG, FIG, PPIF and MIS Other | ||||||||||
MIS Other | Consists of non-ratings revenue from ICRA, KIS Pricing and KIS Research. These businesses are components of MIS; an LOB of MIS | ||||||||||
Moody’s Corporation and its subsidiaries; MCO; the Company | |||||||||||
Moody’s | |||||||||||
Net income attributable to Moody’s Corporation, which excludes net income from consolidated entities belonging to the minority interest holder | |||||||||||
Net Income | |||||||||||
New D&B | The New D&B Corporation – which comprises the D&B business after September 30, 2000 | ||||||||||
Non-GAAP | A financial measure not in accordance with GAAP; these measures, when read in conjunction with the Company’s reported results, can provide useful supplemental information for investors analyzing period-to-period comparisons of the Company’s performance, facilitate comparisons to competitors’ operating results and to provide greater transparency to investors of supplemental information used by management in its financial and operational decision making. | ||||||||||
NM | Percentage change not meaningful | ||||||||||
NRSRO | Nationally Recognized Statistical Rating Organization | ||||||||||
OCI | Other comprehensive income (loss); includes gains and losses on cash flow and net investment hedges, certain gains and losses relating to pension and other retirement benefit obligations and foreign currency translation adjustments | ||||||||||
Old D&B | The former Dun and Bradstreet Company which distributed New D&B shares on September 30, 2000, and was renamed Moody’s Corporation | ||||||||||
Other Retirement Plans | The U.S. retirement healthcare and U.S. retirement life insurance plans | ||||||||||
PPIF | Public, project and infrastructure finance; an LOB of MIS | ||||||||||
Profit Participation Plan | Defined contribution profit participation plan that covers substantially all U.S. employees of the Company | ||||||||||
PPP | Profit Participation Plan | ||||||||||
PS | Professional Services; an LOB within MA that provides outsourced research and analytical services as well as financial training and certification programs | ||||||||||
RD&A | Research, Data and Analytics; an LOB within MA that produces, sells and distributes research, data and related content. Includes products generated by MIS, such as analyses on major debt issuers, industry studies, and commentary on topical credit events, as well as economic research, data, quantitative risk scores, and other analytical tools that are produced within MA | ||||||||||
Redeemable Noncontrolling Interest | Represents minority shareholders’ interest in entities which are controlled but not wholly-owned by Moody’s and for which Moody’s obligation to redeem the minority shareholders’ interest is represented by a put/call relationship | ||||||||||
Reform Act | Credit Rating Agency Reform Act of 2006 | ||||||||||
REITs | Real estate investment trusts | ||||||||||
Relationship Revenue | Represents MIS recurring monitoring of a rated debt obligation and/or entities that issue such obligations, as well as revenue from programs such as commercial paper, medium-term notes and shelf registrations. For MIS Other represents subscription-based revenue. For MA, represents subscription-based revenue and software maintenance revenue. | ||||||||||
Retirement Plans | Moody’s funded and unfunded pension plans, the healthcare plans and life insurance plans | ||||||||||
RMBS | Residential mortgage-backed securities; part of SFG | ||||||||||
S&P | Standard & Poor’s, a division of McGraw-Hill Financial, Inc. | ||||||||||
SEC | Securities and Exchange Commission | ||||||||||
Securities Act | Securities Act of 1933 | ||||||||||
Series 2005-1 Notes | Principal amount of $300 million, 4.98% senior unsecured notes; notes were paid in 2014 in advance of their contractual maturity date | ||||||||||
Series 2007-1 Notes | Principal amount of $300 million, 6.06% senior unsecured notes due in September 2017 pursuant to the 2007 Agreement | ||||||||||
SFG | Structured finance group; an LOB of MIS | ||||||||||
SG&A | Selling, general and administrative expenses | ||||||||||
SIV | Structured Investment Vehicle | ||||||||||
Solvency II | EU directive 2009/138/EC that codifies the amount of capital that EU insurance companies must hold to reduce insolvency | ||||||||||
Stock Plans | The Old D&B’s 1998 Key Employees’ Stock Incentive Plan and the Restated 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan | ||||||||||
Total Debt | All indebtedness of the Company as reflected on the consolidated balance sheets | ||||||||||
TPE | Third party evidence, as defined in the ASC, used to determine selling price based on a vendor’s or any competitor’s largely interchangeable products or services in standalone sales transactions to similarly situated customers | ||||||||||
Transaction Revenue | For MIS, represents the initial rating of a new debt issuance as well as other one-time fees. For MIS Other, represents revenue from professional services and outsourcing engagements. For MA, represents software license fees and revenue from risk management advisory projects, training and certification services, and outsourced research and analytical engagements | ||||||||||
U.K. | United Kingdom | ||||||||||
U.S. | United States | ||||||||||
U.S. Shared National Credit Program | Interagency program designed to evaluate large and complex syndicated credits. The program is administered by the three federal banking regulatory agencies which include the Federal Reserve System, Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC). | ||||||||||
USD | U.S. dollar | ||||||||||
UTBs | Unrecognized tax benefits | ||||||||||
UTPs | Uncertain tax positions | ||||||||||
VSOE | Vendor specific objective evidence; evidence, as defined in the ASC, of selling price limited to either of the following: the price charged for a deliverable when it is sold separately, or for a deliverable not yet being sold separately, the price established by management having the relevant authority | ||||||||||
WACC | Weighted average cost of capital | ||||||||||
WebEquity | WebEquity Solutions LLC; a leading provider of cloud-based loan origination solutions for financial institutions; part of the ERS LOB within MA; an acquisition completed in July 2014 | ||||||||||
1998 Plan | Old D&B’s 1998 Key Employees’ Stock Incentive Plan | ||||||||||
2000 Distribution | The distribution by Old D&B to its shareholders of all of the outstanding shares of New D&B common stock on September 30, 2000 | ||||||||||
2000 Distribution | Agreement governing certain ongoing relationships between the Company and New D&B after the 2000 Distribution including the sharing of any liabilities for the payment of taxes, penalties and interest resulting from unfavorable IRS determinations on certain tax matters and certain other potential tax liabilities | ||||||||||
Agreement | |||||||||||
2001 Plan | The Amended and Restated 2001 Moody’s Corporation Key Employees’ Stock Incentive Plan | ||||||||||
2005 Agreement | Note purchase agreement dated September 30, 2005 relating to the Series 2005-1 Notes | ||||||||||
2007 Agreement | Note purchase agreement dated September 7, 2007 relating to the Series 2007-1 Notes | ||||||||||
2007 Facility | Revolving credit facility of $1 billion entered into on September 28, 2007, expiring in 2012 | ||||||||||
2010 Indenture | Supplemental indenture and related agreements dated August 19, 2010, relating to the 2010 Senior Notes | ||||||||||
2010 Senior Notes | Principal amount of $500.0 million, 5.50% senior unsecured notes due in September 2020 pursuant to the 2010 Indenture | ||||||||||
2012 Facility | Revolving credit facility of $1 billion entered into on April 18, 2012, was replaced with the 2015 Facility | ||||||||||
2012 Indenture | Supplemental indenture and related agreements dated August 18, 2012, relating to the 2012 Senior Notes | ||||||||||
2012 Senior Notes | Principal amount of $500 million, 4.50% senior unsecured notes due in September 2022 pursuant to the 2012 Indenture | ||||||||||
2013 Indenture | Supplemental indenture and related agreements dated August 12, 2013, relating to the 2013 Senior Notes | ||||||||||
2013 Senior Notes | Principal amount of $500 million, 4.875% senior unsecured notes due in February 2024 pursuant to the 2013 Indenture | ||||||||||
2014 Indenture | Supplemental indenture and related agreements dated July 16, 2014, relating to the 2014 Senior Notes | ||||||||||
2014 Senior Notes (5- Year) | Principal amount of $450 million, 2.75% senior unsecured notes due in July 2019 | ||||||||||
2014 Senior Notes (30-Year) | Principal amount of $600 million, 5.25% senior unsecured notes due in July 2044 | ||||||||||
2015 Facility | Five-year unsecured revolving credit facility, with capacity to borrow up to $1 billion; replaces the 2012 Facility | ||||||||||
2015 Indenture | Supplemental indenture and related agreements dated March 9, 2015, relating to the 2015 Senior Notes | ||||||||||
2015 Senior Notes | Principal amount €500 million, 1.75% senior unsecured notes issued March 9, 2015 and due in March 2027 | ||||||||||
7WTC | The Company’s corporate headquarters located at 7 World Trade Center | ||||||||||
7WTC Lease | Operating lease agreement entered into on October 20, 2006 |
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NOTE 1 DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Moody’s is a provider of (i) credit ratings, (ii) credit, capital markets and economic research, data and analytical tools, (iii) software solutions and related risk management services, (iv) quantitative credit risk measures, financial services training and certification services and (v) research and analytical services. Moody’s has two reportable segments: MIS and MA.
MIS, the credit rating agency, publishes credit ratings on a wide range of debt obligations and the entities that issue such obligations in markets worldwide. Revenue is primarily derived from the originators and issuers of such transactions who use MIS ratings in the distribution of their debt issues to investors. Additionally, MIS earns revenue from certain non-ratings-related operations which consist primarily of the distribution of research and financial instrument pricing services in the Asia-Pacific region as well as revenue from ICRA’s non-ratings operations. The revenue from these operations is included in the MIS Other LOB and is not material to the results of the MIS segment.
The MA segment develops a wide range of products and services that support financial analysis and risk management activities of institutional participants in global financial markets. Within its RD&A business, MA distributes research and data developed by MIS as part of its ratings process, including in-depth research on major debt issuers, industry studies and commentary on topical credit-related events. The RD&A business also produces economic research as well as data and analytical tools such as quantitative credit risk scores. Within its ERS business, MA provides software solutions as well as related risk management services. The PS business provides research and analytical services along with financial training and certification programs.
In the first quarter of 2016, the Company adopted ASU No. 2015-17 “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes” on a prospective basis, and accordingly, prior year comparative periods have not been adjusted. This ASU requires the classification of all deferred income tax assets and liabilities as noncurrent on the balance sheet.
In the first quarter of 2016, the Company adopted ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance Costs” on a retrospective basis. This ASU requires a company to present debt issuance costs in the balance sheet as a reduction of debt rather than as an asset. The impact to the Company’s balance sheet as of December 31, 2016 and 2015 relating to the adoption of this ASU is set forth in the table below:
Certain reclassifications have been made to prior period amounts to conform to the current presentation.
As reported December 31, 2015 | Reclassification | December 31, 2015 As adjusted | As reported December 31, 2016 | Reclassification | December 31, 2016 Under previous accounting guidance | ||||||||||||
Long-term debt | $ | 3,401.0 | $ | (20.4) | $ | 3,380.6 | $ | 3,063.0 | $ | 17.7 | $ | 3,080.7 | |||||
Other assets | $ | 160.8 | $ | (20.4) | $ | 140.4 | $ | 112.2 | $ | 17.7 | $ | 129.9 |
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As reported December 31, 2015 | Reclassification | December 31, 2015 As adjusted | As reported December 31, 2016 | Reclassification | December 31, 2016 Under previous accounting guidance | ||||||||||||
Long-term debt | $ | 3,401.0 | $ | (20.4) | $ | 3,380.6 | $ | 3,063.0 | $ | 17.7 | $ | 3,080.7 | |||||
Other assets | $ | 160.8 | $ | (20.4) | $ | 140.4 | $ | 112.2 | $ | 17.7 | $ | 129.9 |
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NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The consolidated financial statements include those of Moody’s Corporation and its majority- and wholly-owned subsidiaries. The effects of all intercompany transactions have been eliminated. Investments in companies for which the Company has significant influence over operating and financial policies but not a controlling interest are accounted for on an equity basis whereby the Company records its proportional share of the investment’s net income or loss as part of other non-operating income (expense), net and any dividends received reduce the carrying amount of the investment. The Company applies the guidelines set forth in Topic 810 of the ASC in assessing its interests in variable interest entities to decide whether to consolidate that entity. The Company has reviewed the potential variable interest entities and determined that there are no consolidation requirements under Topic 810 of the ASC. The Company consolidates its ICRA subsidiaries on a three month lag.
Cash and Cash Equivalents
Cash equivalents principally consist of investments in money market mutual funds and money market deposit accounts as well as high-grade commercial paper and certificates of deposit with maturities of three months or less when purchased.
Short-term Investments
Short-term investments are securities with maturities greater than 90 days at the time of purchase that are available for operations in the next 12 months. The Company’s short-term investments primarily consist of certificates of deposit and their cost approximates fair value due to the short-term nature of the instruments. Interest and dividends on these investments are recorded into income when earned.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives. Expenditures for maintenance and repairs that do not extend the economic useful life of the related assets are charged to expense as incurred.
Research and Development Costs
All research and development costs are expensed as incurred. These costs primarily reflect the development of credit processing software and quantitative credit risk assessment products sold by the MA segment.
Research and development costs were $40.1 million, $29.1 million, and $37.9 million for the years ended December 31, 2016, 2015 and 2014, respectively, and are included in operating expenses within the Company’s consolidated statements of operations. These costs generally consist of professional services provided by third parties and compensation costs of employees.
Costs for internally developed computer software that will be sold, leased or otherwise marketed are capitalized when technological feasibility has been established. These costs primarily relate to the development or enhancement of products in the ERS business and generally consist of professional services provided by third parties and compensation costs of employees that develop the software. Judgment is required in determining when technological feasibility of a product is established and the Company believes that technological feasibility for its software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers. Accordingly, costs for internally developed computer software that will be sold, leased or otherwise marketed that were eligible for capitalization under Topic 985 of the ASC were immaterial for the years ended December 31, 2016, 2015 and 2014.
Computer Software Developed or Obtained for Internal Use
The Company capitalizes costs related to software developed or obtained for internal use. These assets, included in property and equipment in the consolidated balance sheets, relate to the Company’s accounting, product delivery and other systems. Such costs generally consist of direct costs for third-party license fees, professional services provided by third parties and employee compensation, in each case incurred either during the application development stage or in connection with upgrades and enhancements that increase functionality. Such costs are depreciated over their estimated useful lives on a straight-line basis. Costs incurred during the preliminary project stage of development as well as maintenance costs are expensed as incurred.
Long-Lived Assets, Including Goodwill and Other Acquired Intangible Assets
Moody’s evaluates its goodwill for impairment at the reporting unit level, defined as an operating segment or one level below an operating segment, annually as of July 31 or more frequently if impairment indicators arise in accordance with ASC Topic 350.
The Company evaluates the recoverability of goodwill using a three-step impairment test approach at the reporting unit level. In the first step, the Company assesses various qualitative factors to determine whether the fair value of a reporting unit may be less than its carrying amount. If a determination is made that, based on the qualitative factors, an impairment does not exist, the Company is not required to perform further testing. If the aforementioned qualitative assessment results in the Company concluding that it is more likely than not that the fair value of a reporting unit may be less than its carrying amount, the fair value of the reporting unit will be determined and compared to its carrying value including goodwill. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and the Company is not required to perform further testing. If the fair value of the reporting unit is less than the carrying value, the Company must perform a third step of the impairment test to determine the implied fair value of the reporting unit’s goodwill. The implied fair value of the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than its carrying value, the difference is recognized as an impairment charge. The Company evaluates its reporting units for impairment on an annual basis, or more frequently if there are changes in the reporting structure of the Company due to acquisitions or realignments or if there are indicators of potential impairment. For the reporting units where the Company is consistently able to conclude that an impairment does not exist using only a qualitative approach, the Company’s accounting policy is to perform the second step of the aforementioned goodwill impairment assessment at least once every three years. Goodwill is assigned to a reporting unit at the date when an acquisition is integrated into one of the established reporting units, and is based on which reporting unit is expected to benefit from the synergies of the acquisition.
For purposes of assessing the recoverability of goodwill, the Company has six primary reporting units at December 31, 2016: two within the Company’s ratings business (one for the ICRA business and one that encompasses all of Moody’s other ratings operations) and four reporting units within MA: RD&A, ERS, FSTC and MAKS. The RD&A reporting unit encompasses the distribution of investor-oriented research and data developed by MIS as part of its ratings process, in-depth research on major debt issuers, industry studies, economic research and commentary on topical events and credit analytic tools. The ERS reporting unit consists of credit risk management and compliance software that is sold on a license or subscription basis as well as related advisory services for implementation and maintenance. The FSTC reporting unit consists of the portion of the MA business that offers both credit training as well as other professional development training and certification services. The MAKS reporting unit consists of research and analytical services.
Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Rent Expense
The Company records rent expense on a straight-line basis over the life of the lease. In cases where there is a free rent period or future fixed rent escalations the Company will record a deferred rent liability. Additionally, the receipt of any lease incentives will be recorded as a deferred rent liability which will be amortized over the lease term as a reduction of rent expense.
Stock-Based Compensation
The Company records compensation expense for all share-based payment award transactions granted to employees based on the fair value of the equity instrument at the time of grant. This includes shares issued under stock option and restricted stock plans. The Company has also established a pool of additional paid-in capital related to the net Excess Tax Benefits relating to employee share-based compensation, which is available to absorb any recognized tax shortfalls.
Derivative Instruments and Hedging Activities
Based on the Company’s risk management policy, from time to time the Company may use derivative financial instruments to reduce exposure to changes in foreign exchange rates and interest rates. The Company does not enter into derivative financial instruments for speculative purposes. All derivative financial instruments are recorded on the balance sheet at their respective fair values. The changes in the value of derivatives that qualify as fair value hedges are recorded with a corresponding adjustment to the carrying value of the item being hedged. Changes in the derivative’s fair value that qualify as cash flow hedges are recorded to other comprehensive income or loss, to the extent the hedge is effective, and such amounts are reclassified from accumulated other comprehensive income or loss to earnings in the same period or periods during which the hedged transaction affects income. Changes in the derivative’s fair value that qualify as net investment hedges are recorded to other comprehensive income or loss, to the extent the hedge is effective. Any changes in the fair value of derivatives that the Company does not designate as hedging instruments under Topic 815 of the ASC are recorded in the consolidated statements of operations in the period in which they occur.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or the services have been provided and accepted by the customer when applicable, fees are determinable and the collection of resulting receivables is considered probable.
Pursuant to ASC Topic 605, when a sales arrangement contains multiple deliverables, the Company allocates revenue to each deliverable based on its relative selling price which is determined based on its vendor specific objective evidence if available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE nor TPE is available.
The Company’s products and services will generally qualify as separate units of accounting under ASC Topic 605. The Company evaluates each deliverable in an arrangement to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has stand-alone value to the customers and if the arrangement includes a customer refund or return right relative to the delivered item and the delivery and performance of the undelivered item is considered probable and substantially in the Company’s control. In instances where the aforementioned criteria are not met, the deliverable is combined with the undelivered items and revenue recognition is determined as one single unit.
The Company determines whether its selling price in a multi-element transaction meets the VSOE criteria by using the price charged for a deliverable when sold separately or, if the deliverable is not yet being sold separately, the price established by management having the relevant authority to establish such a price. In instances where the Company is not able to establish VSOE for all deliverables in a multiple element arrangement, which may be due to the Company infrequently selling each element separately, not selling products within a reasonably narrow price range, or only having a limited sales history, the Company attempts to establish TPE for deliverables. The Company determines whether TPE exists by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. However, due to the difficulty in obtaining third party pricing, possible differences in its market strategy from that of its peers and the potential that products and services offered by the Company may contain a significant level of differentiation and/or customization such that the comparable pricing of products with similar functionality cannot be obtained, the Company generally is unable to reliably determine TPE. Based on the selling price hierarchy established by ASC Topic 605, when the Company is unable to establish selling price using VSOE or TPE, the Company will establish an ESP. ESP is the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company establishes its best estimate of ESP considering internal factors relevant to is pricing practices such as costs and margin objectives, standalone sales prices of similar products, percentage of the fee charged for a primary product or service relative to a related product or service, and customer segment and geography. Additional consideration is also given to market conditions such as competitor pricing strategies and market trend. The Company reviews its determination of VSOE, TPE and ESP on an annual basis or more frequently as needed.
In the MIS segment, revenue attributed to initial ratings of issued securities is recognized when the rating is issued. Revenue attributed to monitoring of issuers or issued securities is recognized ratably over the period in which the monitoring is performed, generally one year. In the case of commercial mortgage-backed securities, structured credit, international residential mortgage-backed and asset-backed securities, issuers can elect to pay the monitoring fees upfront. These fees are deferred and recognized over the future monitoring periods based on the expected lives of the rated securities, which was approximately 25 years on a weighted average basis at December 31, 2016. At December 31, 2016, 2015 and 2014, deferred revenue related to these securities was approximately $133 million, $121 million, and $107 million, respectively.
Multiple element revenue arrangements in the MIS segment are generally comprised of an initial rating and the related monitoring service. In instances where monitoring fees are not charged for the first year monitoring effort, fees are allocated to the initial rating and monitoring services based on the relative selling price of each service to the total arrangement fees. The Company generally uses ESP in determining the selling price for its initial ratings as the Company rarely sells initial ratings separately without providing related monitoring services and thus is unable to establish VSOE or TPE for initial ratings.
MIS estimates revenue for ratings of commercial paper for which, in addition to a fixed annual monitoring fee, issuers are billed quarterly based on amounts outstanding. Revenue is accrued each quarter based on estimated amounts outstanding and is billed when actual data is available. The estimate is determined based on the issuers’ most recent reported quarterly data. At December 31, 2016, 2015 and 2014, accounts receivable included approximately $25 million, $24 million, and $22 million, respectively, related to accrued commercial paper revenue. Historically, MIS has not had material differences between the estimated revenue and the actual billings. Furthermore, for certain annual monitoring services, fees are not invoiced until the end of the annual monitoring period and revenue is accrued ratably over the monitoring period. At December 31, 2016, 2015, and 2014, accounts receivable included approximately $159.1 million, $146.4 million, and $127.8 million, respectively, relating to accrued monitoring service revenue.
In the MA segment, products and services offered by the Company include software licenses and related maintenance, subscriptions, and professional services. Revenue from subscription based products, such as research and data subscriptions and certain software-based credit risk management subscription products, is recognized ratably over the related subscription period, which is principally one year. Revenue from sale of perpetual licenses of credit processing software is generally recognized at the time the product master or first copy is delivered or transferred to and accepted by the customer. If uncertainty exists regarding customer acceptance of the product or service, revenue is not recognized until acceptance occurs. Software maintenance revenue is recognized ratably over the annual maintenance period. Revenue from professional services rendered is generally recognized as the services are performed. A large portion of annual research and data subscriptions and annual software maintenance are invoiced in the months of November, December and January.
Products and services offered within the MA segment are sold either stand-alone or together in various combinations. In instances where a multiple element arrangement includes software and non-software deliverables, revenue is allocated to the non-software deliverables and to the software deliverables, as a group, using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. Revenue is recognized for each element based upon the conditions for revenue recognition noted above.
If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is allocated to each software deliverable using VSOE. In the instances where the Company is not able to determine VSOE for all of the deliverables of an arrangement, the Company allocates the revenue to the undelivered elements equal to its VSOE and the residual revenue to the delivered elements. If the Company is unable to determine VSOE for an undelivered element, the Company defers all revenue allocated to the software deliverables until the Company has delivered all of the elements or when VSOE has been determined for the undelivered elements. In cases where software implementation services are considered essential and VSOE of fair value exists for post-contract customer support (“PCS”), once the delivery criteria has been met on the standard software, license and service revenue is recognized on a percentage-of-completion basis as implementation services are performed, while PCS is recognized over the coverage period. If VSOE of fair value does not exist for PCS, once the delivery criteria has been met on the standard software, service revenue is recognized on a zero profit margin basis until essential services are complete, at which point total remaining arrangement revenue is then spread ratably over the remaining PCS coverage period. If VSOE does not exist for PCS at the beginning of an arrangement but is established during implementation, revenue not recognized due to the absence of VSOE will be recognized on a cumulative basis.
Accounts Receivable Allowances
Moody’s records an allowance for estimated future adjustments to customer billings as a reduction of revenue, based on historical experience and current conditions. Such amounts are reflected as additions to the accounts receivable allowance. Additionally, estimates of uncollectible accounts are recorded as bad debt expense and are reflected as additions to the accounts receivable allowance. Actual billing adjustments and uncollectible account write-offs are recorded against the allowance. Moody’s evaluates its accounts receivable allowance by reviewing and assessing historical collection and adjustment experience and the current status of customer accounts. Moody’s also considers the economic environment of the customers, both from an industry and geographic perspective, in evaluating the need for allowances. Based on its analysis, Moody’s adjusts its allowance as considered appropriate in the circumstances.
Contingencies
Moody’s is involved in legal and tax proceedings, governmental investigations and inquiries, claims and litigation that are incidental to the Company’s business, including claims based on ratings assigned by MIS. Moody’s is also subject to ongoing tax audits in the normal course of business. Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available. Moody’s discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.
For claims, litigation and proceedings and governmental investigations and inquires not related to income taxes, where it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated, the Company records liabilities in the consolidated financial statements and periodically adjusts these as appropriate. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another amount within the range. In other instances, where a loss is reasonably possible, management may not record a liability because of uncertainties related to the probable outcome and/or the amount or range of loss, but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. In view of the inherent difficulty of predicting the outcome of litigation, regulatory, governmental investigations and inquiries, enforcement and similar matters, particularly where the claimants seek large or indeterminate damages or where the parties assert novel legal theories or the matters involve a large number of parties, the Company cannot predict what the eventual outcome of the pending matters will be or the timing of any resolution of such matters. The Company also cannot predict the impact (if any) that any such matters may have on how its business is conducted, on its competitive position or on its financial position, results of operations or cash flows. As the process to resolve any pending matters progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and the effects, if any, on its operations and financial condition. However, in light of the large or indeterminate damages sought in some of them, the absence of similar court rulings on the theories of law asserted and uncertainties regarding apportionment of any potential damages, an estimate of the range of possible losses cannot be made at this time.
The Company’s wholly-owned insurance subsidiary insures the Company against certain risks including but not limited to deductibles for worker’s compensation, employment practices litigation and employee medical claims and terrorism, for which the claims are not material to the Company. In addition, for claim years 2008 and 2009, the insurance subsidiary insured the Company for defense costs related to professional liability claims. For matters insured by the Company’s insurance subsidiary, Moody’s records liabilities based on the estimated total claims expected to be paid and total projected costs to defend a claim through its anticipated conclusion. The Company determines liabilities based on an assessment of management’s best estimate of claims to be paid and legal defense costs as well as actuarially determined estimates. Defense costs for matters not self-insured by the Company’s wholly-owned insurance subsidiary are expensed as services are provided.
For income tax matters, the Company employs the prescribed methodology of Topic 740 of the ASC which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.
Operating Expenses
Operating expenses include costs associated with the development and production of the Company’s products and services and their delivery to customers. These expenses principally include employee compensation and benefits and travel costs that are incurred in connection with these activities. Operating expenses are charged to income as incurred, except for certain costs related to software implementation services which are deferred until related revenue is recognized. Additionally, certain costs incurred to develop internal use software are capitalized and depreciated over their estimated useful life.
Selling, General and Administrative Expenses
SG&A expenses include such items as compensation and benefits for corporate officers and staff and compensation and other expenses related to sales of products. They also include items such as office rent, business insurance, professional fees and gains and losses from sales and disposals of assets. SG&A expenses are charged to income as incurred, except for certain expenses incurred to develop internal use software are capitalized and depreciated over their estimated useful life.
Redeemable Noncontrolling Interest
The Company records its redeemable noncontrolling interest at fair value on the date of the related business combination transaction. The redeemable noncontrolling interest represents noncontrolling shareholders’ interest in entities which are controlled but not wholly-owned by Moody’s and for which Moody’s obligation to redeem the minority shareholders’ interest is governed by a put/call relationship. Subsequent to the initial measurement, the redeemable noncontrolling interest is recorded at the greater of its redemption value or its carrying value at the end of each reporting period. If the redeemable noncontrolling interest is carried at its redemption value, the difference between the redemption value and the carrying value would be adjusted through capital surplus at the end of each reporting period. The Company also performs a quarterly assessment to determine if the aforementioned redemption value exceeds the fair value of the redeemable noncontrolling interest. If the redemption value of the redeemable noncontrolling interest were to exceed its fair value, the excess would reduce the net income attributable to Moody’s shareholders. The Company settled its redeemable noncontrolling interest in the fourth quarter of 2014 by exercising its call option to acquire the remaining share of Copal Amba that it did not previously own.
Foreign Currency Translation
For all operations outside the U.S. where the Company has designated the local currency as the functional currency, assets and liabilities are translated into U.S. dollars using end of year exchange rates, and revenue and expenses are translated using average exchange rates for the year. For these foreign operations, currency translation adjustments are accumulated in a separate component of shareholders’ deficit.
Comprehensive Income
Comprehensive income represents the change in net assets of a business enterprise during a period due to transactions and other events and circumstances from non-owner sources including foreign currency translation impacts, net actuarial losses and net prior service costs related to pension and other retirement plans, gains and losses on derivative instruments designated as net investment hedges or cash flow hedges and unrealized gains and losses on securities designated as ‘available-for-sale’ under Topic 320 of the ASC. Comprehensive income items, including cumulative translation adjustments of entities that are less-than-wholly-owned subsidiaries, will be reclassified to noncontrolling interests and thereby, adjusting accumulated other comprehensive income proportionately in accordance with the percentage of ownership interest of the NCI shareholder.
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with ASC Topic 740. Therefore, income tax expense is based on reported income before income taxes and deferred income taxes reflect the effect of temporary differences between the amounts of assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. In 2016, the Company adopted ASU No. 2015-17, “Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes” whereby all deferred income tax assets and liabilities as well as any related valuation allowances are classified as noncurrent on the balance sheet.
The Company classifies interest related to unrecognized tax benefits as a component of interest expense in its consolidated statements of operations. Penalties are recognized in other non-operating expenses. For uncertain tax positions (“UTPs”), the Company first determines whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.
For certain of its non-U.S. subsidiaries, the Company has deemed the undistributed earnings relating to these subsidiaries to be indefinitely reinvested within its foreign operations. Accordingly, the Company has not provided deferred income taxes on these indefinitely reinvested earnings. It is not practicable to determine the amount of deferred taxes that might be required to be provided if such earnings were distributed in the future due to complexities in the tax laws and in the hypothetical calculations that would have to be made.
Fair Value of Financial Instruments
The Company’s financial instruments include cash, cash equivalents, trade receivables and payables, all of which are short-term in nature and, accordingly, approximate fair value. Additionally, the Company invests in certain short-term investments consisting primarily of certificates of deposit that are carried at cost, which approximates fair value due to their short-term maturities.
The Company also has certain investments in closed-ended and open-ended mutual funds in India which are designated as ‘available for sale’ under Topic 320 of the ASC. Accordingly, unrealized gains and losses on these investments are recorded to other comprehensive income and are reclassified out of accumulated other comprehensive income to the statement of operations when the investment matures or is sold using a specific identification method.
Also, the Company uses derivative instruments, as further described in Note 5, to manage certain financial exposures that occur in the normal course of business. These derivative instruments are carried at fair value on the Company’s consolidated balance sheets.
The Company also was subject to contingent consideration obligations related to certain of its acquisitions as more fully discussed in Note 10. These obligations were carried at their estimated fair value within the Company’s consolidated balance sheets.
Fair value is defined by the ASC as the price that would be received from selling an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between market participants at the measurement date. The determination of this fair value is based on the principal or most advantageous market in which the Company could commence transactions and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance. Also, determination of fair value assumes that market participants will consider the highest and best use of the asset.
The ASC establishes a fair value hierarchy whereby the inputs contained in valuation techniques used to measure fair value are categorized into three broad levels as follows:
Level 1 : quoted market prices in active markets that the reporting entity has the ability to access at the date of the fair value measurement;
Level 2 : inputs other than quoted market prices described in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;
Level 3 : unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurement of the assets or liabilities.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk principally consist of cash and cash equivalents, short-term investments, trade receivables and derivatives.
The Company manages its credit risk exposure by allocating its cash equivalents among various money market mutual funds, money market deposit accounts, certificates of deposits and high-grade commercial paper. Short-term investments primarily consist of certificates of deposit as of December 31, 2016 and 2015. The Company manages its credit risk exposure on cash equivalents and short-term investments by limiting the amount it can invest with any single entity. No customer accounted for 10% or more of accounts receivable at December 31, 2016 or 2015.
Earnings (Loss) per Share of Common Stock
Basic shares outstanding is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted shares outstanding is calculated giving effect to all potentially dilutive common shares, assuming that such shares were outstanding and dilutive during the reporting period.
Pension and Other Retirement Benefits
Moody’s maintains various noncontributory DBPPs as well as other contributory and noncontributory retirement plans. The expense and assets/liabilities that the Company reports for its pension and other retirement benefits are dependent on many assumptions concerning the outcome of future events and circumstances. These assumptions represent the Company’s best estimates and may vary by plan. The differences between the assumptions for the expected long-term rate of return on plan assets and actual experience is spread over a five-year period to the market-related value of plan assets which is used in determining the expected return on assets component of annual pension expense. All other actuarial gains and losses are generally deferred and amortized over the estimated average future working life of active plan participants.
The Company recognizes as an asset or liability in its consolidated balance sheet the funded status of its defined benefit retirement plans, measured on a plan-by-plan basis. Changes in the funded status due to actuarial gains/losses are recorded as part of other comprehensive income during the period the changes occur.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Estimates are used for, but not limited to, revenue recognition, accounts receivable allowances, income taxes, contingencies, valuation of long-lived and intangible assets, goodwill, pension and other retirement benefits, stock-based compensation, and depreciable lives for property and equipment and computer software.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU outlines a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14 “Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date” which defers the effective date of the ASU for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted up to the original effective date of December 15, 2016. In addition, during 2016, the FASB issued additional updates clarifying the implementation guidance for the new revenue recognition standard.
The Company intends to adopt the new revenue guidance as of January 1, 2018 using the modified retrospective transition method and is currently evaluating the impact that adoption of these updates will have on its consolidated financial statements. Currently, the Company believes this ASU will have an impact on, but is not limited to: i) the accounting for certain software subscription revenue in MA whereby the license rights within the arrangement would be recognized at the inception of the contract based on estimated stand-alone selling price with the remainder recognized over the subscription period; ii) the accounting for certain ERS revenue arrangements where VSOE is not currently available under ASC 605 should result in the acceleration of revenue recognition and iii) the capitalization of certain contract implementation costs for its ERS business which will be expensed as incurred under the new standard.
In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments – Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities”. The amendments in this ASU update various aspects of recognition, measurement, presentation and disclosures relating to financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of this ASU on the Company’s financial statements. The Company believes that the most pertinent impact to its financial statements upon the adoption of this ASU will relate to the discontinuance of the available-for-sale classification for investments in equity securities (unrealized gains and losses were recorded through OCI). Accordingly, subsequent to adoption of this ASU, changes in the fair value of equity securities held by the Company will be recorded through earnings.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” requiring lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses and cash flows will depend on classification as either a finance or operating lease. This ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. This standard must be adopted using a modified retrospective approach whereby leases will be presented in accordance with the new standard as of the earliest period presented. The Company is currently evaluating the impact of this ASU on the Company’s financial statements. The Company believes that the most notable impact to its financial statements upon the adoption of this ASU will be the recognition of a material right-of-use asset and lease liability for its real estate leases.
In March 2016, the FASB issued ASU No. 2016-07, “Investments—Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting”. This ASU amends the accounting for an investment not previously accounted for under the equity method that subsequently qualifies for the equity method of accounting. It requires a company to add the cost of the additional interest acquired to its current basis and the commencement of the equity method of accounting when the criteria are met. In addition, the unrealized gains or losses in accumulated other comprehensive related to an available for sale equity security should be recognized through earnings if the investment subsequently qualifies for the equity method of accounting. The amendments of this ASU are effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The adoption of this ASU will only impact the Company if an investment not previously accounted for under the equity method qualifies for accounting under the equity method.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting”. This ASU changes various aspects related to the accounting for share-based payments including: i) accounting for Excess Tax Benefits and shortfalls; ii) the accounting for forfeitures; iii) restrictions on the value of shares retained by an entity to fund the employee’s portion of payroll taxes; and iv) classification of Excess Tax Benefits in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016 and early adoption is permitted if all amendments are adopted in the same period. The Company expects that the most significant effect of this ASU will be the impact on its reported Net Income and Diluted EPS as Excess Tax Benefits and shortfalls will be recorded to the provision for income taxes under this ASU as compared to an adjustment to capital surplus under current GAAP. The Company will adopt this ASU in the first quarter of 2017. The Company expects that the adoption of this ASU will result in a benefit to the 2017 ETR of approximately 200 BPS, or a $0.15 benefit per diluted share. This estimated impact is subject to change based on the trading price of the Company’s stock on the date that stock-based compensation awards are exercised/delivered and on the volume of employee exercises/delivery of restricted stock. Due to the sensitivity that Moody’s stock price has on the value of the Excess Tax Benefit/Shortfall, the impact in a given year may not be indicative of the impact in future years.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments”. The amendments in this ASU require the use of an “expected credit loss” impairment model for most financial assets reported at amortized cost which will require entities to estimate expected credit losses over the lifetime of the instrument. This may result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, an allowance for credit losses will be recognized as a contra account to the amortized cost carrying value of the asset rather than a direct reduction to the carrying value, with changes in the allowance impacting earnings. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted in annual and interim reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company is currently evaluating the impact of this ASU on its financial statements. Currently, the Company believes that the most notable impact of this ASU will relate to its processes around the assessment of the adequacy of its allowance for doubtful accounts on accounts receivable.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230),” Classification of Certain Cash Receipts and Cash Payments. This ASU adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows with the intent to alleviate diversity in practice for classifying various types of cash flows. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The Company will apply this clarification guidance in its statements of cash flows upon adoption.
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory”. This ASU requires companies to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, instead of deferring recognition until the asset has been sold to a third party as required under current GAAP. The ASU is effective for annual and interim reporting periods beginning after December 15, 2017, using a modified retrospective approach, with the cumulative effect recognized through retained earnings at the date of adoption. Early adoption is permitted. The Company intends to early adopt this ASU in the first quarter of 2017 and does not anticipate it will have a material impact on its financial statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business”. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017 and should be applied prospectively. Early adoption is permitted. Upon adoption, the Company will apply the guidance in this ASU when evaluating whether acquired assets and activities constitute a business.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment”. This ASU removes the step of the goodwill impairment assessment in which a company must measure a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the ASU, goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019 and should be applied prospectively. Early adoption is permitted. The Company intends to early adopt this ASU for impairment assessments performed in 2017.
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Basis of Consolidation
The consolidated financial statements include those of Moody’s Corporation and its majority- and wholly-owned subsidiaries. The effects of all intercompany transactions have been eliminated. Investments in companies for which the Company has significant influence over operating and financial policies but not a controlling interest are accounted for on an equity basis whereby the Company records its proportional share of the investment’s net income or loss as part of other non-operating income (expense), net and any dividends received reduce the carrying amount of the investment. The Company applies the guidelines set forth in Topic 810 of the ASC in assessing its interests in variable interest entities to decide whether to consolidate that entity. The Company has reviewed the potential variable interest entities and determined that there are no consolidation requirements under Topic 810 of the ASC. The Company consolidates its ICRA subsidiaries on a three month lag.
Cash and Cash Equivalents
Cash equivalents principally consist of investments in money market mutual funds and money market deposit accounts as well as high-grade commercial paper and certificates of deposit with maturities of three months or less when purchased.
Short-term Investments
Short-term investments are securities with maturities greater than 90 days at the time of purchase that are available for operations in the next 12 months. The Company’s short-term investments primarily consist of certificates of deposit and their cost approximates fair value due to the short-term nature of the instruments. Interest and dividends on these investments are recorded into income when earned.
Property and Equipment
Property and equipment are stated at cost and are depreciated using the straight-line method over their estimated useful lives. Expenditures for maintenance and repairs that do not extend the economic useful life of the related assets are charged to expense as incurred.
Research and Development Costs
All research and development costs are expensed as incurred. These costs primarily reflect the development of credit processing software and quantitative credit risk assessment products sold by the MA segment.
Research and development costs were $40.1 million, $29.1 million, and $37.9 million for the years ended December 31, 2016, 2015 and 2014, respectively, and are included in operating expenses within the Company’s consolidated statements of operations. These costs generally consist of professional services provided by third parties and compensation costs of employees.
Costs for internally developed computer software that will be sold, leased or otherwise marketed are capitalized when technological feasibility has been established. These costs primarily relate to the development or enhancement of products in the ERS business and generally consist of professional services provided by third parties and compensation costs of employees that develop the software. Judgment is required in determining when technological feasibility of a product is established and the Company believes that technological feasibility for its software products is reached after all high-risk development issues have been resolved through coding and testing. Generally, this occurs shortly before the products are released to customers. Accordingly, costs for internally developed computer software that will be sold, leased or otherwise marketed that were eligible for capitalization under Topic 985 of the ASC were immaterial for the years ended December 31, 2016, 2015 and 2014.
Computer Software Developed or Obtained for Internal Use
The Company capitalizes costs related to software developed or obtained for internal use. These assets, included in property and equipment in the consolidated balance sheets, relate to the Company’s accounting, product delivery and other systems. Such costs generally consist of direct costs for third-party license fees, professional services provided by third parties and employee compensation, in each case incurred either during the application development stage or in connection with upgrades and enhancements that increase functionality. Such costs are depreciated over their estimated useful lives on a straight-line basis. Costs incurred during the preliminary project stage of development as well as maintenance costs are expensed as incurred.
Long-Lived Assets, Including Goodwill and Other Acquired Intangible Assets
Moody’s evaluates its goodwill for impairment at the reporting unit level, defined as an operating segment or one level below an operating segment, annually as of July 31 or more frequently if impairment indicators arise in accordance with ASC Topic 350.
The Company evaluates the recoverability of goodwill using a three-step impairment test approach at the reporting unit level. In the first step, the Company assesses various qualitative factors to determine whether the fair value of a reporting unit may be less than its carrying amount. If a determination is made that, based on the qualitative factors, an impairment does not exist, the Company is not required to perform further testing. If the aforementioned qualitative assessment results in the Company concluding that it is more likely than not that the fair value of a reporting unit may be less than its carrying amount, the fair value of the reporting unit will be determined and compared to its carrying value including goodwill. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and the Company is not required to perform further testing. If the fair value of the reporting unit is less than the carrying value, the Company must perform a third step of the impairment test to determine the implied fair value of the reporting unit’s goodwill. The implied fair value of the goodwill is determined based on the difference between the fair value of the reporting unit and the net fair value of the identifiable assets and liabilities of the reporting unit. If the implied fair value of the goodwill is less than its carrying value, the difference is recognized as an impairment charge. The Company evaluates its reporting units for impairment on an annual basis, or more frequently if there are changes in the reporting structure of the Company due to acquisitions or realignments or if there are indicators of potential impairment. For the reporting units where the Company is consistently able to conclude that an impairment does not exist using only a qualitative approach, the Company’s accounting policy is to perform the second step of the aforementioned goodwill impairment assessment at least once every three years. Goodwill is assigned to a reporting unit at the date when an acquisition is integrated into one of the established reporting units, and is based on which reporting unit is expected to benefit from the synergies of the acquisition.
For purposes of assessing the recoverability of goodwill, the Company has six primary reporting units at December 31, 2016: two within the Company’s ratings business (one for the ICRA business and one that encompasses all of Moody’s other ratings operations) and four reporting units within MA: RD&A, ERS, FSTC and MAKS. The RD&A reporting unit encompasses the distribution of investor-oriented research and data developed by MIS as part of its ratings process, in-depth research on major debt issuers, industry studies, economic research and commentary on topical events and credit analytic tools. The ERS reporting unit consists of credit risk management and compliance software that is sold on a license or subscription basis as well as related advisory services for implementation and maintenance. The FSTC reporting unit consists of the portion of the MA business that offers both credit training as well as other professional development training and certification services. The MAKS reporting unit consists of research and analytical services.
Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.
Rent Expense
The Company records rent expense on a straight-line basis over the life of the lease. In cases where there is a free rent period or future fixed rent escalations the Company will record a deferred rent liability. Additionally, the receipt of any lease incentives will be recorded as a deferred rent liability which will be amortized over the lease term as a reduction of rent expense.
Stock-Based Compensation
The Company records compensation expense for all share-based payment award transactions granted to employees based on the fair value of the equity instrument at the time of grant. This includes shares issued under stock option and restricted stock plans. The Company has also established a pool of additional paid-in capital related to the net Excess Tax Benefits relating to employee share-based compensation, which is available to absorb any recognized tax shortfalls.
Derivative Instruments and Hedging Activities
Based on the Company’s risk management policy, from time to time the Company may use derivative financial instruments to reduce exposure to changes in foreign exchange rates and interest rates. The Company does not enter into derivative financial instruments for speculative purposes. All derivative financial instruments are recorded on the balance sheet at their respective fair values. The changes in the value of derivatives that qualify as fair value hedges are recorded with a corresponding adjustment to the carrying value of the item being hedged. Changes in the derivative’s fair value that qualify as cash flow hedges are recorded to other comprehensive income or loss, to the extent the hedge is effective, and such amounts are reclassified from accumulated other comprehensive income or loss to earnings in the same period or periods during which the hedged transaction affects income. Changes in the derivative’s fair value that qualify as net investment hedges are recorded to other comprehensive income or loss, to the extent the hedge is effective. Any changes in the fair value of derivatives that the Company does not designate as hedging instruments under Topic 815 of the ASC are recorded in the consolidated statements of operations in the period in which they occur.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or the services have been provided and accepted by the customer when applicable, fees are determinable and the collection of resulting receivables is considered probable.
Pursuant to ASC Topic 605, when a sales arrangement contains multiple deliverables, the Company allocates revenue to each deliverable based on its relative selling price which is determined based on its vendor specific objective evidence if available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE nor TPE is available.
The Company’s products and services will generally qualify as separate units of accounting under ASC Topic 605. The Company evaluates each deliverable in an arrangement to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has stand-alone value to the customers and if the arrangement includes a customer refund or return right relative to the delivered item and the delivery and performance of the undelivered item is considered probable and substantially in the Company’s control. In instances where the aforementioned criteria are not met, the deliverable is combined with the undelivered items and revenue recognition is determined as one single unit.
The Company determines whether its selling price in a multi-element transaction meets the VSOE criteria by using the price charged for a deliverable when sold separately or, if the deliverable is not yet being sold separately, the price established by management having the relevant authority to establish such a price. In instances where the Company is not able to establish VSOE for all deliverables in a multiple element arrangement, which may be due to the Company infrequently selling each element separately, not selling products within a reasonably narrow price range, or only having a limited sales history, the Company attempts to establish TPE for deliverables. The Company determines whether TPE exists by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. However, due to the difficulty in obtaining third party pricing, possible differences in its market strategy from that of its peers and the potential that products and services offered by the Company may contain a significant level of differentiation and/or customization such that the comparable pricing of products with similar functionality cannot be obtained, the Company generally is unable to reliably determine TPE. Based on the selling price hierarchy established by ASC Topic 605, when the Company is unable to establish selling price using VSOE or TPE, the Company will establish an ESP. ESP is the price at which the Company would transact a sale if the product or service were sold on a stand-alone basis. The Company establishes its best estimate of ESP considering internal factors relevant to is pricing practices such as costs and margin objectives, standalone sales prices of similar products, percentage of the fee charged for a primary product or service relative to a related product or service, and customer segment and geography. Additional consideration is also given to market conditions such as competitor pricing strategies and market trend. The Company reviews its determination of VSOE, TPE and ESP on an annual basis or more frequently as needed.
In the MIS segment, revenue attributed to initial ratings of issued securities is recognized when the rating is issued. Revenue attributed to monitoring of issuers or issued securities is recognized ratably over the period in which the monitoring is performed, generally one year. In the case of commercial mortgage-backed securities, structured credit, international residential mortgage-backed and asset-backed securities, issuers can elect to pay the monitoring fees upfront. These fees are deferred and recognized over the future monitoring periods based on the expected lives of the rated securities, which was approximately 25 years on a weighted average basis at December 31, 2016. At December 31, 2016, 2015 and 2014, deferred revenue related to these securities was approximately $133 million, $121 million, and $107 million, respectively.
Multiple element revenue arrangements in the MIS segment are generally comprised of an initial rating and the related monitoring service. In instances where monitoring fees are not charged for the first year monitoring effort, fees are allocated to the initial rating and monitoring services based on the relative selling price of each service to the total arrangement fees. The Company generally uses ESP in determining the selling price for its initial ratings as the Company rarely sells initial ratings separately without providing related monitoring services and thus is unable to establish VSOE or TPE for initial ratings.
MIS estimates revenue for ratings of commercial paper for which, in addition to a fixed annual monitoring fee, issuers are billed quarterly based on amounts outstanding. Revenue is accrued each quarter based on estimated amounts outstanding and is billed when actual data is available. The estimate is determined based on the issuers’ most recent reported quarterly data. At December 31, 2016, 2015 and 2014, accounts receivable included approximately $25 million, $24 million, and $22 million, respectively, related to accrued commercial paper revenue. Historically, MIS has not had material differences between the estimated revenue and the actual billings. Furthermore, for certain annual monitoring services, fees are not invoiced until the end of the annual monitoring period and revenue is accrued ratably over the monitoring period. At December 31, 2016, 2015, and 2014, accounts receivable included approximately $159.1 million, $146.4 million, and $127.8 million, respectively, relating to accrued monitoring service revenue.
In the MA segment, products and services offered by the Company include software licenses and related maintenance, subscriptions, and professional services. Revenue from subscription based products, such as research and data subscriptions and certain software-based credit risk management subscription products, is recognized ratably over the related subscription period, which is principally one year. Revenue from sale of perpetual licenses of credit processing software is generally recognized at the time the product master or first copy is delivered or transferred to and accepted by the customer. If uncertainty exists regarding customer acceptance of the product or service, revenue is not recognized until acceptance occurs. Software maintenance revenue is recognized ratably over the annual maintenance period. Revenue from professional services rendered is generally recognized as the services are performed. A large portion of annual research and data subscriptions and annual software maintenance are invoiced in the months of November, December and January.
Products and services offered within the MA segment are sold either stand-alone or together in various combinations. In instances where a multiple element arrangement includes software and non-software deliverables, revenue is allocated to the non-software deliverables and to the software deliverables, as a group, using the relative selling prices of each of the deliverables in the arrangement based on the aforementioned selling price hierarchy. Revenue is recognized for each element based upon the conditions for revenue recognition noted above.
If the arrangement contains more than one software deliverable, the arrangement consideration allocated to the software deliverables as a group is allocated to each software deliverable using VSOE. In the instances where the Company is not able to determine VSOE for all of the deliverables of an arrangement, the Company allocates the revenue to the undelivered elements equal to its VSOE and the residual revenue to the delivered elements. If the Company is unable to determine VSOE for an undelivered element, the Company defers all revenue allocated to the software deliverables until the Company has delivered all of the elements or when VSOE has been determined for the undelivered elements. In cases where software implementation services are considered essential and VSOE of fair value exists for post-contract customer support (“PCS”), once the delivery criteria has been met on the standard software, license and service revenue is recognized on a percentage-of-completion basis as implementation services are performed, while PCS is recognized over the coverage period. If VSOE of fair value does not exist for PCS, once the delivery criteria has been met on the standard software, service revenue is recognized on a zero profit margin basis until essential services are complete, at which point total remaining arrangement revenue is then spread ratably over the remaining PCS coverage period. If VSOE does not exist for PCS at the beginning of an arrangement but is established during implementation, revenue not recognized due to the absence of VSOE will be recognized on a cumulative basis.
Accounts Receivable Allowances
Moody’s records an allowance for estimated future adjustments to customer billings as a reduction of revenue, based on historical experience and current conditions. Such amounts are reflected as additions to the accounts receivable allowance. Additionally, estimates of uncollectible accounts are recorded as bad debt expense and are reflected as additions to the accounts receivable allowance. Actual billing adjustments and uncollectible account write-offs are recorded against the allowance. Moody’s evaluates its accounts receivable allowance by reviewing and assessing historical collection and adjustment experience and the current status of customer accounts. Moody’s also considers the economic environment of the customers, both from an industry and geographic perspective, in evaluating the need for allowances. Based on its analysis, Moody’s adjusts its allowance as considered appropriate in the circumstances.
Contingencies
Moody’s is involved in legal and tax proceedings, governmental investigations and inquiries, claims and litigation that are incidental to the Company’s business, including claims based on ratings assigned by MIS. Moody’s is also subject to ongoing tax audits in the normal course of business. Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available. Moody’s discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.
For claims, litigation and proceedings and governmental investigations and inquires not related to income taxes, where it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated, the Company records liabilities in the consolidated financial statements and periodically adjusts these as appropriate. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another amount within the range. In other instances, where a loss is reasonably possible, management may not record a liability because of uncertainties related to the probable outcome and/or the amount or range of loss, but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. In view of the inherent difficulty of predicting the outcome of litigation, regulatory, governmental investigations and inquiries, enforcement and similar matters, particularly where the claimants seek large or indeterminate damages or where the parties assert novel legal theories or the matters involve a large number of parties, the Company cannot predict what the eventual outcome of the pending matters will be or the timing of any resolution of such matters. The Company also cannot predict the impact (if any) that any such matters may have on how its business is conducted, on its competitive position or on its financial position, results of operations or cash flows. As the process to resolve any pending matters progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and the effects, if any, on its operations and financial condition. However, in light of the large or indeterminate damages sought in some of them, the absence of similar court rulings on the theories of law asserted and uncertainties regarding apportionment of any potential damages, an estimate of the range of possible losses cannot be made at this time.
The Company’s wholly-owned insurance subsidiary insures the Company against certain risks including but not limited to deductibles for worker’s compensation, employment practices litigation and employee medical claims and terrorism, for which the claims are not material to the Company. In addition, for claim years 2008 and 2009, the insurance subsidiary insured the Company for defense costs related to professional liability claims. For matters insured by the Company’s insurance subsidiary, Moody’s records liabilities based on the estimated total claims expected to be paid and total projected costs to defend a claim through its anticipated conclusion. The Company determines liabilities based on an assessment of management’s best estimate of claims to be paid and legal defense costs as well as actuarially determined estimates. Defense costs for matters not self-insured by the Company’s wholly-owned insurance subsidiary are expensed as services are provided.
For income tax matters, the Company employs the prescribed methodology of Topic 740 of the ASC which requires a company to first determine whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.
Operating Expenses
Operating expenses include costs associated with the development and production of the Company’s products and services and their delivery to customers. These expenses principally include employee compensation and benefits and travel costs that are incurred in connection with these activities. Operating expenses are charged to income as incurred, except for certain costs related to software implementation services which are deferred until related revenue is recognized. Additionally, certain costs incurred to develop internal use software are capitalized and depreciated over their estimated useful life.
Selling, General and Administrative Expenses
SG&A expenses include such items as compensation and benefits for corporate officers and staff and compensation and other expenses related to sales of products. They also include items such as office rent, business insurance, professional fees and gains and losses from sales and disposals of assets. SG&A expenses are charged to income as incurred, except for certain expenses incurred to develop internal use software are capitalized and depreciated over their estimated useful life.
Redeemable Noncontrolling Interest
The Company records its redeemable noncontrolling interest at fair value on the date of the related business combination transaction. The redeemable noncontrolling interest represents noncontrolling shareholders’ interest in entities which are controlled but not wholly-owned by Moody’s and for which Moody’s obligation to redeem the minority shareholders’ interest is governed by a put/call relationship. Subsequent to the initial measurement, the redeemable noncontrolling interest is recorded at the greater of its redemption value or its carrying value at the end of each reporting period. If the redeemable noncontrolling interest is carried at its redemption value, the difference between the redemption value and the carrying value would be adjusted through capital surplus at the end of each reporting period. The Company also performs a quarterly assessment to determine if the aforementioned redemption value exceeds the fair value of the redeemable noncontrolling interest. If the redemption value of the redeemable noncontrolling interest were to exceed its fair value, the excess would reduce the net income attributable to Moody’s shareholders. The Company settled its redeemable noncontrolling interest in the fourth quarter of 2014 by exercising its call option to acquire the remaining share of Copal Amba that it did not previously own.
Redeemable Noncontrolling Interest
The Company records its redeemable noncontrolling interest at fair value on the date of the related business combination transaction. The redeemable noncontrolling interest represents noncontrolling shareholders’ interest in entities which are controlled but not wholly-owned by Moody’s and for which Moody’s obligation to redeem the minority shareholders’ interest is governed by a put/call relationship. Subsequent to the initial measurement, the redeemable noncontrolling interest is recorded at the greater of its redemption value or its carrying value at the end of each reporting period. If the redeemable noncontrolling interest is carried at its redemption value, the difference between the redemption value and the carrying value would be adjusted through capital surplus at the end of each reporting period. The Company also performs a quarterly assessment to determine if the aforementioned redemption value exceeds the fair value of the redeemable noncontrolling interest. If the redemption value of the redeemable noncontrolling interest were to exceed its fair value, the excess would reduce the net income attributable to Moody’s shareholders. The Company settled its redeemable noncontrolling interest in the fourth quarter of 2014 by exercising its call option to acquire the remaining share of Copal Amba that it did not previously own.
Foreign Currency Translation
For all operations outside the U.S. where the Company has designated the local currency as the functional currency, assets and liabilities are translated into U.S. dollars using end of year exchange rates, and revenue and expenses are translated using average exchange rates for the year. For these foreign operations, currency translation adjustments are accumulated in a separate component of shareholders’ deficit.
Comprehensive Income
Comprehensive income represents the change in net assets of a business enterprise during a period due to transactions and other events and circumstances from non-owner sources including foreign currency translation impacts, net actuarial losses and net prior service costs related to pension and other retirement plans, gains and losses on derivative instruments designated as net investment hedges or cash flow hedges and unrealized gains and losses on securities designated as ‘available-for-sale’ under Topic 320 of the ASC. Comprehensive income items, including cumulative translation adjustments of entities that are less-than-wholly-owned subsidiaries, will be reclassified to noncontrolling interests and thereby, adjusting accumulated other comprehensive income proportionately in accordance with the percentage of ownership interest of the NCI shareholder.
Income Taxes
The Company accounts for income taxes under the asset and liability method in accordance with ASC Topic 740. Therefore, income tax expense is based on reported income before income taxes and deferred income taxes reflect the effect of temporary differences between the amounts of assets and liabilities that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. In 2016, the Company adopted ASU No. 2015-17, “Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes” whereby all deferred income tax assets and liabilities as well as any related valuation allowances are classified as noncurrent on the balance sheet.
The Company classifies interest related to unrecognized tax benefits as a component of interest expense in its consolidated statements of operations. Penalties are recognized in other non-operating expenses. For uncertain tax positions (“UTPs”), the Company first determines whether it is more-likely-than-not (defined as a likelihood of more than fifty percent) that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more-likely-than-not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority.
For certain of its non-U.S. subsidiaries, the Company has deemed the undistributed earnings relating to these subsidiaries to be indefinitely reinvested within its foreign operations. Accordingly, the Company has not provided deferred income taxes on these indefinitely reinvested earnings. It is not practicable to determine the amount of deferred taxes that might be required to be provided if such earnings were distributed in the future due to complexities in the tax laws and in the hypothetical calculations that would have to be made.
Fair Value of Financial Instruments
The Company’s financial instruments include cash, cash equivalents, trade receivables and payables, all of which are short-term in nature and, accordingly, approximate fair value. Additionally, the Company invests in certain short-term investments consisting primarily of certificates of deposit that are carried at cost, which approximates fair value due to their short-term maturities.
The Company also has certain investments in closed-ended and open-ended mutual funds in India which are designated as ‘available for sale’ under Topic 320 of the ASC. Accordingly, unrealized gains and losses on these investments are recorded to other comprehensive income and are reclassified out of accumulated other comprehensive income to the statement of operations when the investment matures or is sold using a specific identification method.
Also, the Company uses derivative instruments, as further described in Note 5, to manage certain financial exposures that occur in the normal course of business. These derivative instruments are carried at fair value on the Company’s consolidated balance sheets.
The Company also was subject to contingent consideration obligations related to certain of its acquisitions as more fully discussed in Note 10. These obligations were carried at their estimated fair value within the Company’s consolidated balance sheets.
Fair value is defined by the ASC as the price that would be received from selling an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between market participants at the measurement date. The determination of this fair value is based on the principal or most advantageous market in which the Company could commence transactions and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance. Also, determination of fair value assumes that market participants will consider the highest and best use of the asset.
The ASC establishes a fair value hierarchy whereby the inputs contained in valuation techniques used to measure fair value are categorized into three broad levels as follows:
Level 1 : quoted market prices in active markets that the reporting entity has the ability to access at the date of the fair value measurement;
Level 2 : inputs other than quoted market prices described in Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities;
Level 3 : unobservable inputs that are supported by little or no market activity and that are significant to the fair value measurement of the assets or liabilities.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk principally consist of cash and cash equivalents, short-term investments, trade receivables and derivatives.
The Company manages its credit risk exposure by allocating its cash equivalents among various money market mutual funds, money market deposit accounts, certificates of deposits and high-grade commercial paper. Short-term investments primarily consist of certificates of deposit as of December 31, 2016 and 2015. The Company manages its credit risk exposure on cash equivalents and short-term investments by limiting the amount it can invest with any single entity. No customer accounted for 10% or more of accounts receivable at December 31, 2016 or 2015.
Earnings (Loss) per Share of Common Stock
Basic shares outstanding is calculated based on the weighted average number of shares of common stock outstanding during the reporting period. Diluted shares outstanding is calculated giving effect to all potentially dilutive common shares, assuming that such shares were outstanding and dilutive during the reporting period.
Pension and Other Retirement Benefits
Moody’s maintains various noncontributory DBPPs as well as other contributory and noncontributory retirement plans. The expense and assets/liabilities that the Company reports for its pension and other retirement benefits are dependent on many assumptions concerning the outcome of future events and circumstances. These assumptions represent the Company’s best estimates and may vary by plan. The differences between the assumptions for the expected long-term rate of return on plan assets and actual experience is spread over a five-year period to the market-related value of plan assets which is used in determining the expected return on assets component of annual pension expense. All other actuarial gains and losses are generally deferred and amortized over the estimated average future working life of active plan participants.
The Company recognizes as an asset or liability in its consolidated balance sheet the funded status of its defined benefit retirement plans, measured on a plan-by-plan basis. Changes in the funded status due to actuarial gains/losses are recorded as part of other comprehensive income during the period the changes occur
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the period. Actual results could differ from those estimates. Estimates are used for, but not limited to, revenue recognition, accounts receivable allowances, income taxes, contingencies, valuation of long-lived and intangible assets, goodwill, pension and other retirement benefits, stock-based compensation, and depreciable lives for property and equipment and computer software.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. This ASU outlines a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. In August 2015, the FASB issued ASU No. 2015-14 “Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date” which defers the effective date of the ASU for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted up to the original effective date of December 15, 2016. In addition, during 2016, the FASB issued additional updates clarifying the implementation guidance for the new revenue recognition standard.
The Company intends to adopt the new revenue guidance as of January 1, 2018 using the modified retrospective transition method and is currently evaluating the impact that adoption of these updates will have on its consolidated financial statements. Currently, the Company believes this ASU will have an impact on, but is not limited to: i) the accounting for certain software subscription revenue in MA whereby the license rights within the arrangement would be recognized at the inception of the contract based on estimated stand-alone selling price with the remainder recognized over the subscription period; ii) the accounting for certain ERS revenue arrangements where VSOE is not currently available under ASC 605 should result in the acceleration of revenue recognition and iii) the capitalization of certain contract implementation costs for its ERS business which will be expensed as incurred under the new standard.
In January 2016, the FASB issued ASU No. 2016-01 “Financial Instruments – Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities”. The amendments in this ASU update various aspects of recognition, measurement, presentation and disclosures relating to financial instruments. This ASU is effective for fiscal years beginning after December 15, 2017. The Company is currently evaluating the impact of this ASU on the Company’s financial statements. The Company believes that the most pertinent impact to its financial statements upon the adoption of this ASU will relate to the discontinuance of the available-for-sale classification for investments in equity securities (unrealized gains and losses were recorded through OCI). Accordingly, subsequent to adoption of this ASU, changes in the fair value of equity securities held by the Company will be recorded through earnings.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” requiring lessees to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses and cash flows will depend on classification as either a finance or operating lease. This ASU is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. This standard must be adopted using a modified retrospective approach whereby leases will be presented in accordance with the new standard as of the earliest period presented. The Company is currently evaluating the impact of this ASU on the Company’s financial statements. The Company believes that the most notable impact to its financial statements upon the adoption of this ASU will be the recognition of a material right-of-use asset and lease liability for its real estate leases.
In March 2016, the FASB issued ASU No. 2016-07, “Investments—Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting”. This ASU amends the accounting for an investment not previously accounted for under the equity method that subsequently qualifies for the equity method of accounting. It requires a company to add the cost of the additional interest acquired to its current basis and the commencement of the equity method of accounting when the criteria are met. In addition, the unrealized gains or losses in accumulated other comprehensive related to an available for sale equity security should be recognized through earnings if the investment subsequently qualifies for the equity method of accounting. The amendments of this ASU are effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The adoption of this ASU will only impact the Company if an investment not previously accounted for under the equity method qualifies for accounting under the equity method.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting”. This ASU changes various aspects related to the accounting for share-based payments including: i) accounting for Excess Tax Benefits and shortfalls; ii) the accounting for forfeitures; iii) restrictions on the value of shares retained by an entity to fund the employee’s portion of payroll taxes; and iv) classification of Excess Tax Benefits in the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016 and early adoption is permitted if all amendments are adopted in the same period. The Company expects that the most significant effect of this ASU will be the impact on its reported Net Income and Diluted EPS as Excess Tax Benefits and shortfalls will be recorded to the provision for income taxes under this ASU as compared to an adjustment to capital surplus under current GAAP. The Company will adopt this ASU in the first quarter of 2017. The Company expects that the adoption of this ASU will result in a benefit to the 2017 ETR of approximately 200 BPS, or a $0.15 benefit per diluted share. This estimated impact is subject to change based on the trading price of the Company’s stock on the date that stock-based compensation awards are exercised/delivered and on the volume of employee exercises/delivery of restricted stock. Due to the sensitivity that Moody’s stock price has on the value of the Excess Tax Benefit/Shortfall, the impact in a given year may not be indicative of the impact in future years.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments”. The amendments in this ASU require the use of an “expected credit loss” impairment model for most financial assets reported at amortized cost which will require entities to estimate expected credit losses over the lifetime of the instrument. This may result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, an allowance for credit losses will be recognized as a contra account to the amortized cost carrying value of the asset rather than a direct reduction to the carrying value, with changes in the allowance impacting earnings. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019, with early adoption permitted in annual and interim reporting periods beginning after December 15, 2018. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first effective reporting period. The Company is currently evaluating the impact of this ASU on its financial statements. Currently, the Company believes that the most notable impact of this ASU will relate to its processes around the assessment of the adequacy of its allowance for doubtful accounts on accounts receivable.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230),” Classification of Certain Cash Receipts and Cash Payments. This ASU adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows with the intent to alleviate diversity in practice for classifying various types of cash flows. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017, with early adoption permitted. The Company will apply this clarification guidance in its statements of cash flows upon adoption.
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory”. This ASU requires companies to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, instead of deferring recognition until the asset has been sold to a third party as required under current GAAP. The ASU is effective for annual and interim reporting periods beginning after December 15, 2017, using a modified retrospective approach, with the cumulative effect recognized through retained earnings at the date of adoption. Early adoption is permitted. The Company intends to early adopt this ASU in the first quarter of 2017 and does not anticipate it will have a material impact on its financial statements.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business”. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017 and should be applied prospectively. Early adoption is permitted. Upon adoption, the Company will apply the guidance in this ASU when evaluating whether acquired assets and activities constitute a business.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment”. This ASU removes the step of the goodwill impairment assessment in which a company must measure a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. Under the ASU, goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019 and should be applied prospectively. Early adoption is permitted. The Company intends to early adopt this ASU for impairment assessments performed in 2017.
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NOTE 3 RECONCILIATION OF WEIGHTED AVERAGE SHARES OUTSTANDING
Below is a reconciliation of basic to diluted shares outstanding:
Year Ended December 31, | |||||||
2016 | 2015 | 2014 | |||||
Basic | 192.7 | 200.1 | 210.7 | ||||
Dilutive effect of shares issuable under stock-based compensation plans | 2.7 | 3.3 | 4.0 | ||||
Diluted | 195.4 | 203.4 | 214.7 | ||||
Antidilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above | 0.6 | 0.7 | 0.7 |
The calculation of diluted EPS requires certain assumptions regarding the use of both cash proceeds and assumed proceeds that would be received upon the exercise of stock options and vesting of restricted stock outstanding as of December 31, 2016, 2015 and 2014. These assumed proceeds include Excess Tax Benefits and any unrecognized compensation on the awards.
The decrease in the diluted shares outstanding primarily reflects treasury share repurchases under the Company’s Board authorized share repurchase program.
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Year Ended December 31, | |||||||
2016 | 2015 | 2014 | |||||
Basic | 192.7 | 200.1 | 210.7 | ||||
Dilutive effect of shares issuable under stock-based compensation plans | 2.7 | 3.3 | 4.0 | ||||
Diluted | 195.4 | 203.4 | 214.7 | ||||
Antidilutive options to purchase common shares and restricted stock as well as contingently issuable restricted stock which are excluded from the table above | 0.6 | 0.7 | 0.7 |
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NOTE 4 CASH EQUIVALENTS AND INVESTMENTS
The table below provides additional information on the Company’s cash equivalents and investments:
As of December 31, 2016 | |||||||||||||||||
Balance sheet location | |||||||||||||||||
Cost | Gross Unrealized Gains | Fair Value | Cash and cash equivalents | Short-term investments | Other assets | ||||||||||||
Money market mutual funds | $ | 189.0 | $ | - | $ | 189.0 | $ | 189.0 | $ | - | $ | - | |||||
Certificates of deposit and money market deposit accounts (1) | $ | 1,190.5 | $ | - | $ | 1,190.5 | $ | 1,017.0 | $ | 173.4 | $ | 0.1 | |||||
Fixed maturity and open ended mutual funds (2) | $ | 27.0 | $ | 5.6 | $ | 32.6 | $ | - | $ | - | $ | 32.6 | |||||
As of December 31, 2015 | |||||||||||||||||
Balance sheet location | |||||||||||||||||
Cost | Gross Unrealized Gains | Fair Value | Cash and cash equivalents | Short-term investments | Other assets | ||||||||||||
Money market mutual funds | $ | 188.3 | $ | - | $ | 188.3 | $ | 188.3 | $ | - | $ | - | |||||
Certificates of deposit and money market deposit accounts (1) | $ | 1,307.3 | $ | - | $ | 1,307.3 | $ | 809.4 | $ | 474.8 | $ | 23.1 | |||||
Fixed maturity and open ended mutual funds (2) | $ | 28.7 | $ | 3.2 | $ | 31.9 | $ | - | $ | - | $ | 31.9 | |||||
(1) Consists of time deposits and money market deposit accounts. The remaining contractual maturities for the certificates of deposits classified as short-term investments were one month to 12 months at both December 31, 2016 and December 31, 2015. The remaining contractual maturities for the certificates of deposits classified in other assets are 13 months to 15 months at December 31, 2016 and one month to 27 months at December 31, 2015. Time deposits with a maturity of less than 90 days at time of purchase are classified as cash and cash equivalents. | |||||||||||||||||
(2) Consists of investments in fixed maturity mutual funds and open-ended mutual funds. The remaining contractual maturities for the fixed maturity instruments range from six months to 19 months and 11 months to 31 months at December 31, 2016 and December 31, 2015 respectively. |
The money market mutual funds as well as the fixed maturity and open ended mutual funds in the table above are deemed to be ‘available for sale’ under ASC Topic 320 and the fair value of these instruments is determined using Level 1 inputs as defined in the ASC.
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As of December 31, 2016 | |||||||||||||||||
Balance sheet location | |||||||||||||||||
Cost | Gross Unrealized Gains | Fair Value | Cash and cash equivalents | Short-term investments | Other assets | ||||||||||||
Money market mutual funds | $ | 189.0 | $ | - | $ | 189.0 | $ | 189.0 | $ | - | $ | - | |||||
Certificates of deposit and money market deposit accounts (1) | $ | 1,190.5 | $ | - | $ | 1,190.5 | $ | 1,017.0 | $ | 173.4 | $ | 0.1 | |||||
Fixed maturity and open ended mutual funds (2) | $ | 27.0 | $ | 5.6 | $ | 32.6 | $ | - | $ | - | $ | 32.6 | |||||
As of December 31, 2015 | |||||||||||||||||
Balance sheet location | |||||||||||||||||
Cost | Gross Unrealized Gains | Fair Value | Cash and cash equivalents | Short-term investments | Other assets | ||||||||||||
Money market mutual funds | $ | 188.3 | $ | - | $ | 188.3 | $ | 188.3 | $ | - | $ | - | |||||
Certificates of deposit and money market deposit accounts (1) | $ | 1,307.3 | $ | - | $ | 1,307.3 | $ | 809.4 | $ | 474.8 | $ | 23.1 | |||||
Fixed maturity and open ended mutual funds (2) | $ | 28.7 | $ | 3.2 | $ | 31.9 | $ | - | $ | - | $ | 31.9 | |||||
(1) Consists of time deposits and money market deposit accounts. The remaining contractual maturities for the certificates of deposits classified as short-term investments were one month to 12 months at both December 31, 2016 and December 31, 2015. The remaining contractual maturities for the certificates of deposits classified in other assets are 13 months to 15 months at December 31, 2016 and one month to 27 months at December 31, 2015. Time deposits with a maturity of less than 90 days at time of purchase are classified as cash and cash equivalents. | |||||||||||||||||
(2) Consists of investments in fixed maturity mutual funds and open-ended mutual funds. The remaining contractual maturities for the fixed maturity instruments range from six months to 19 months and 11 months to 31 months at December 31, 2016 and December 31, 2015 respectively. |
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NOTE 5 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to global market risks, including risks from changes in FX rates and changes in interest rates. Accordingly, the Company uses derivatives in certain instances to manage the aforementioned financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for speculative purposes.
Derivatives and non-derivative instruments designated as accounting hedges:
Interest Rate Swaps
The Company has entered into interest rate swaps to convert the fixed interest rate on certain of its long-term debt to a floating interest rate based on the 3-month LIBOR. The purpose of these hedges is to mitigate the risk associated with changes in the fair value of the long-term debt, thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of the debt. The changes in the fair value of the swaps and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest expense, net in the Company’s consolidated statement of operations.
The following table summarizes the Company’s interest rate swaps designated as fair value hedges:
Hedged Item | Nature of Swap | Notional AmountAs of December 31, | Floating Interest Rate | ||||||
2016 | 2015 | ||||||||
$500M fixed-rate 2010 Senior Notes due 2020 | Pay Floating/Receive Fixed | $ | 500.0 | $ | 500.0 | 3-month LIBOR | |||
$450M fixed-rate 2014 Senior Notes due 2019 | Pay Floating/Receive Fixed | $ | 450.0 | $ | 450.0 | 3-month LIBOR | |||
$500M fixed-rate 2012 Senior Notes due 2022 | Pay Floating/Receive Fixed | $ | 80.0 | $ | 3-month LIBOR |
The following table summarizes the impact to the statement of operations of the Company’s interest rate swaps designated as fair value hedges:
Amount of Income Recognized in the Consolidated Statements of Operations | ||||||||||||||
Year Ended December 31, | ||||||||||||||
Derivatives Designated as Fair Value Accounting Hedges | Location on Consolidated Statement of Operations | 2016 | 2015 | 2014 | ||||||||||
Interest rate swaps | Interest expense, net | $ | 11.2 | $ | 15.2 | $ | 11.7 |
Cross-currency swaps
In conjunction with the issuance of the 2015 Senior Notes, the Company entered into a cross-currency swap to exchange €100 million for U.S. dollars on the date of the settlement of the notes. The purpose of this cross-currency swap is to mitigate FX risk on the remaining principal balance on the 2015 Senior Notes that was not designated as a net investment hedge as more fully discussed below. Under the terms of the swap, the Company will pay the counterparty interest on the $110.5 million received at 3.945% per annum and the counterparty will pay the Company interest on the €100 million paid at 1.75% per annum. These interest payments will be settled in March of each year, beginning in 2016, until either the maturity of the cross-currency swap in 2027 or upon early termination at the discretion of the Company. The principal payments on this cross currency swap will be settled in 2027, concurrent with the repayment of the 2015 Senior Notes at maturity or upon early termination at the discretion of the Company. In March 2016, the Company designated these cross-currency swaps as cash flow hedges. Accordingly, changes in fair value subsequent to the date the swaps were designated as cash flow hedges will initially be recognized in OCI. Gains and losses on the swaps initially recognized in OCI will be reclassified to the statement of operations in the period in which changes in the underlying hedged item affects net income. Ineffectiveness, if any, will be recognized in other non-operating (expense) income, net in the Company’s consolidated statement of operations.
Net Investment Hedges
The Company enters into foreign currency forward contracts that are designated as net investment hedges and additionally has designated €400 million of the 2015 Senior Notes as a net investment hedge. These hedges are intended to mitigate FX exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against changes in foreign exchange rates. These net investment hedges are designated as accounting hedges under the applicable sections of Topic 815 of the ASC.
Hedge effectiveness is assessed based on the overall changes in the fair value of the hedge. For hedges that meet the effectiveness requirements, any change in the fair value are recorded in AOCI in the foreign currency translation account. Any change in the fair value of these hedges that is the result of ineffectiveness is recognized immediately in other non-operating (expense) income, net in the Company’s consolidated statement of operations.
The following table summarizes the notional amounts of the Company’s outstanding
December 31, | December 31, | ||||||||
2016 | 2015 | ||||||||
Notional amount of net investment hedges: | Sell | Buy | Sell | Buy | |||||
Contracts to sell GBP for euros | £ | 22.1 | € | 26.4 | £ | 21.2 | € | 29.1 | |
Contracts to sell Japanese yen for USD | ¥ | - | $ | - | ¥ | 19,400.0 | $ | 161.8 |
The outstanding contracts to sell GBP for euros mature in June 2017. The hedge relating to the portion of the 2015 Senior Notes that was designated as a net investment hedge will end upon the repayment of the notes in 2027 unless terminated earlier at the discretion of the Company.
The following table provides information on the gains/(losses) on the Company’s net investment and cash flow hedges:
Amount of Gain/(Loss) Recognized in AOCI on Derivative (Effective Portion), net of Tax | Amount of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion),net of tax | |||||||||||||||||||||
Derivatives and Non-Derivative Instruments in Net Investment Hedging Relationships | Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||
FX forwards | $ | (12.0) | $ | 13.4 | $ | 19.4 | $ | - | $ | - | $ | - | ||||||||||
Long-term debt | 7.8 | 4.7 | - | - | - | - | ||||||||||||||||
Total net investment hedges | $ | (4.2) | $ | 18.1 | $ | 19.4 | $ | - | $ | - | $ | - | ||||||||||
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||
Derivatives in Cash Flow Hedging Relationships | ||||||||||||||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||
Cross currency swap | $ | (0.9) | $ | - | $ | - | $ | (3.7) | * | $ | - | $ | - | |||||||||
Treasury rate lock | - | (1.1) | - | - | - | - | ||||||||||||||||
Total cash flow hedges | (0.9) | (1.1) | - | (3.7) | - | - | ||||||||||||||||
Total | $ | (5.1) | $ | 17.0 | $ | 19.4 | Total | $ | (3.7) | $ | - | $ | - | |||||||||
* Reflects $6 million in losses recorded in other non-operating income, net and $2.3 million relating to the tax effect of the aforementioned item. | ||||||||||||||||||||||
The cumulative amount of realized and unrecognized net investment and cash flow hedge gains/(losses) recorded in AOCI is as follows:
Cumulative Gains/(Losses), net of tax | ||||||
December 31, | December 31, | |||||
2016 | 2015 | |||||
Net investment hedges | ||||||
FX forwards | $ | 22.3 | $ | 34.3 | ||
Long-term debt | 12.5 | 4.7 | ||||
Total net investment hedges | $ | 34.8 | $ | 39.0 | ||
Cash flow hedges | ||||||
Treasury rate lock | (1.1) | (1.1) | ||||
Cross currency swap | 2.8 | - | ||||
Total losses on cash flow hedges | 1.7 | (1.1) | ||||
Total net gains in AOCI | $ | 36.5 | $ | 37.9 |
Derivatives not designated as accounting hedges:
Foreign exchange forwards
The Company also enters into foreign exchange forwards to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than a subsidiary’s functional currency. These forward contracts are not designated as accounting hedges under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating income, net in the Company’s consolidated statements of operations along with the FX gain or loss recognized on the assets and liabilities denominated in a currency other than the subsidiary’s functional currency. These contracts have expiration dates at various times through June 2017.
The following table summarizes the notional amounts of the Company’s outstanding foreign exchange forwards:
December 31, | December 31, | ||||||||
2016 | 2015 | ||||||||
Notional Amount of Currency Pair: | Sell | Buy | Sell | Buy | |||||
Contracts to sell USD for euros | $ | - | € | - | $ | 70.1 | € | 63.4 | |
Contracts to purchase euros with Singapore dollars | S$ | 55.5 | € | 36.0 | S$ | 55.2 | € | 35.5 | |
Contracts to sell euros for Singapore dollars | € | - | S$ | - | € | 1.4 | S$ | 2.2 | |
Contracts to sell euros for GBP | € | 31.0 | £ | 25.9 | € | 23.1 | £ | 16.7 | |
NOTE: € = Euro, £ = British pound, S$ = Singapore dollar, $ = U.S. dollar |
The following table summarizes the impact to the consolidated statements of operations relating to the net losses on the Company’s derivatives which are not designated as hedging instruments:
Year Ended December 31, | |||||||||||||
Derivatives Not Designated as Accounting Hedges | Location on Statement of Operations | 2016 | 2015 | 2014 | |||||||||
Foreign exchange forwards | Other non-operating income, net | $ | (7.2) | $ | (2.8) | $ | (2.0) |
The table below shows the classification between assets and liabilities on the Company’s consolidated balance sheets for the fair value of the derivative instrument as well as the carrying value of its non-derivative debt instruments designated and qualifying as net investment hedges:
Derivative and Non-derivative Instruments | |||||||||
Balance Sheet Location | December 31, 2016 | December 31, 2015 | |||||||
Assets: | |||||||||
Derivatives designated as accounting hedges: | |||||||||
FX forwards on net investment in certain foreign subsidiaries | Other current assets | $ | 0.6 | $ | 0.4 | ||||
Interest rate swaps | Other assets | 7.0 | 12.1 | ||||||
Total derivatives designated as accounting hedges | 7.6 | 12.5 | |||||||
Derivatives not designated as accounting hedges: | |||||||||
FX forwards on certain assets and liabilities | Other current assets | - | 0.1 | ||||||
Total assets | $ | 7.6 | $ | 12.6 | |||||
Liabilities: | |||||||||
Derivatives designated as accounting hedges: | |||||||||
FX forwards on net investment in certain foreign subsidiaries | Accounts payable and accrued liabilities | $ | - | $ | 1.2 | ||||
Interest rate swaps | Other non-current liabilities | 0.8 | 0.3 | ||||||
Total derivatives designated as accounting hedges | 0.8 | 1.5 | |||||||
Non-derivative instrument designated as accounting hedge: | |||||||||
Long-term debt designated as net investment hedge | Long-term debt | 421.9 | 434.5 | ||||||
Derivatives not designated as accounting hedges: | |||||||||
Cross-currency swap | Other non-current liabilities | 3.8 | 7.0 | ||||||
FX forwards on certain assets and liabilities | Accounts payable and accrued liabilities | 0.8 | 1.9 | ||||||
Total liabilities | $ | 427.3 | $ | 444.9 |
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Hedged Item | Nature of Swap | Notional AmountAs of December 31, | Floating Interest Rate | ||||||
2016 | 2015 | ||||||||
$500M fixed-rate 2010 Senior Notes due 2020 | Pay Floating/Receive Fixed | $ | 500.0 | $ | 500.0 | 3-month LIBOR | |||
$450M fixed-rate 2014 Senior Notes due 2019 | Pay Floating/Receive Fixed | $ | 450.0 | $ | 450.0 | 3-month LIBOR | |||
$500M fixed-rate 2012 Senior Notes due 2022 | Pay Floating/Receive Fixed | $ | 80.0 | $ | 3-month LIBOR |
Amount of Income Recognized in the Consolidated Statements of Operations | ||||||||||||||
Year Ended December 31, | ||||||||||||||
Derivatives Designated as Fair Value Accounting Hedges | Location on Consolidated Statement of Operations | 2016 | 2015 | 2014 | ||||||||||
Interest rate swaps | Interest expense, net | $ | 11.2 | $ | 15.2 | $ | 11.7 |
Amount of Gain/(Loss) Recognized in AOCI on Derivative (Effective Portion), net of Tax | Amount of Gain/(Loss) Reclassified from AOCI into Income (Effective Portion),net of tax | |||||||||||||||||||||
Derivatives and Non-Derivative Instruments in Net Investment Hedging Relationships | Year Ended December 31, | Year Ended December 31, | ||||||||||||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||
FX forwards | $ | (12.0) | $ | 13.4 | $ | 19.4 | $ | - | $ | - | $ | - | ||||||||||
Long-term debt | 7.8 | 4.7 | - | - | - | - | ||||||||||||||||
Total net investment hedges | $ | (4.2) | $ | 18.1 | $ | 19.4 | $ | - | $ | - | $ | - | ||||||||||
Year Ended December 31, | Year Ended December 31, | |||||||||||||||||||||
Derivatives in Cash Flow Hedging Relationships | ||||||||||||||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||||||
Cross currency swap | $ | (0.9) | $ | - | $ | - | $ | (3.7) | * | $ | - | $ | - | |||||||||
Treasury rate lock | - | (1.1) | - | - | - | - | ||||||||||||||||
Total cash flow hedges | (0.9) | (1.1) | - | (3.7) | - | - | ||||||||||||||||
Total | $ | (5.1) | $ | 17.0 | $ | 19.4 | Total | $ | (3.7) | $ | - | $ | - | |||||||||
* Reflects $6 million in losses recorded in other non-operating income, net and $2.3 million relating to the tax effect of the aforementioned item. | ||||||||||||||||||||||
Cumulative Gains/(Losses), net of tax | ||||||
December 31, | December 31, | |||||
2016 | 2015 | |||||
Net investment hedges | ||||||
FX forwards | $ | 22.3 | $ | 34.3 | ||
Long-term debt | 12.5 | 4.7 | ||||
Total net investment hedges | $ | 34.8 | $ | 39.0 | ||
Cash flow hedges | ||||||
Treasury rate lock | (1.1) | (1.1) | ||||
Cross currency swap | 2.8 | - | ||||
Total losses on cash flow hedges | 1.7 | (1.1) | ||||
Total net gains in AOCI | $ | 36.5 | $ | 37.9 |
Year Ended December 31, | |||||||||||||
Derivatives Not Designated as Accounting Hedges | Location on Statement of Operations | 2016 | 2015 | 2014 | |||||||||
Foreign exchange forwards | Other non-operating income, net | $ | (7.2) | $ | (2.8) | $ | (2.0) |
Derivative and Non-derivative Instruments | |||||||||
Balance Sheet Location | December 31, 2016 | December 31, 2015 | |||||||
Assets: | |||||||||
Derivatives designated as accounting hedges: | |||||||||
FX forwards on net investment in certain foreign subsidiaries | Other current assets | $ | 0.6 | $ | 0.4 | ||||
Interest rate swaps | Other assets | 7.0 | 12.1 | ||||||
Total derivatives designated as accounting hedges | 7.6 | 12.5 | |||||||
Derivatives not designated as accounting hedges: | |||||||||
FX forwards on certain assets and liabilities | Other current assets | - | 0.1 | ||||||
Total assets | $ | 7.6 | $ | 12.6 | |||||
Liabilities: | |||||||||
Derivatives designated as accounting hedges: | |||||||||
FX forwards on net investment in certain foreign subsidiaries | Accounts payable and accrued liabilities | $ | - | $ | 1.2 | ||||
Interest rate swaps | Other non-current liabilities | 0.8 | 0.3 | ||||||
Total derivatives designated as accounting hedges | 0.8 | 1.5 | |||||||
Non-derivative instrument designated as accounting hedge: | |||||||||
Long-term debt designated as net investment hedge | Long-term debt | 421.9 | 434.5 | ||||||
Derivatives not designated as accounting hedges: | |||||||||
Cross-currency swap | Other non-current liabilities | 3.8 | 7.0 | ||||||
FX forwards on certain assets and liabilities | Accounts payable and accrued liabilities | 0.8 | 1.9 | ||||||
Total liabilities | $ | 427.3 | $ | 444.9 |
December 31, | December 31, | ||||||||
2016 | 2015 | ||||||||
Notional amount of net investment hedges: | Sell | Buy | Sell | Buy | |||||
Contracts to sell GBP for euros | £ | 22.1 | € | 26.4 | £ | 21.2 | € | 29.1 | |
Contracts to sell Japanese yen for USD | ¥ | - | $ | - | ¥ | 19,400.0 | $ | 161.8 |
December 31, | December 31, | ||||||||
2016 | 2015 | ||||||||
Notional Amount of Currency Pair: | Sell | Buy | Sell | Buy | |||||
Contracts to sell USD for euros | $ | - | € | - | $ | 70.1 | € | 63.4 | |
Contracts to purchase euros with Singapore dollars | S$ | 55.5 | € | 36.0 | S$ | 55.2 | € | 35.5 | |
Contracts to sell euros for Singapore dollars | € | - | S$ | - | € | 1.4 | S$ | 2.2 | |
Contracts to sell euros for GBP | € | 31.0 | £ | 25.9 | € | 23.1 | £ | 16.7 | |
NOTE: € = Euro, £ = British pound, S$ = Singapore dollar, $ = U.S. dollar |
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NOTE 6 PROPERTY AND EQUIPMENT, NET
Property and equipment, net consisted of:
December 31, | ||||||
2016 | 2015 | |||||
Office and computer equipment (3 - 10 year estimated useful life) | $ | 189.1 | $ | 172.1 | ||
Office furniture and fixtures (3 - 10 year estimated useful life) | 47.1 | 45.4 | ||||
Internal-use computer software (1 - 10 year estimated useful life) | 452.1 | 387.0 | ||||
Leasehold improvements and building (2 - 20 year estimated useful life) | 233.1 | 220.8 | ||||
Total property and equipment, at cost | 921.4 | 825.3 | ||||
Less: accumulated depreciation and amortization | (595.5) | (518.9) | ||||
Total property and equipment, net | $ | 325.9 | $ | 306.4 |
Depreciation and amortization expense related to the above assets was $92.5 million, $81.6 million, and $67.2 million for the years ended December 31, 2016, 2015 and 2014, respectively.
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December 31, | ||||||
2016 | 2015 | |||||
Office and computer equipment (3 - 10 year estimated useful life) | $ | 189.1 | $ | 172.1 | ||
Office furniture and fixtures (3 - 10 year estimated useful life) | 47.1 | 45.4 | ||||
Internal-use computer software (1 - 10 year estimated useful life) | 452.1 | 387.0 | ||||
Leasehold improvements and building (2 - 20 year estimated useful life) | 233.1 | 220.8 | ||||
Total property and equipment, at cost | 921.4 | 825.3 | ||||
Less: accumulated depreciation and amortization | (595.5) | (518.9) | ||||
Total property and equipment, net | $ | 325.9 | $ | 306.4 |
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NOTE 7 ACQUISITIONS
The business combinations described below are accounted for using the acquisition method of accounting whereby assets acquired and liabilities assumed were recognized at fair value on the date of the transaction. Any excess of the purchase price over the fair value of the assets acquired and liabilities assumed was recorded to goodwill. The Company has not presented proforma combined results because the impact on previously reported statements of operations would not have been material. Additionally, the near term impact to the Company’s operations and cash flows is not material.
Korea Investor Service (KIS)
In July 2016, a subsidiary of the Company acquired the non-controlling interest of KIS and additional shares of KIS Pricing. The aggregate purchase price was not material and the near term impact to operations and cash flow is not expected to be material. KIS and KIS Pricing are a part of the MIS segment.
Gilliland Gold Young (GGY)
On March 1, 2016, subsidiaries of the Company acquired 100% of GGY, a leading provider of advanced actuarial software for the life insurance industry. The cash payments noted in the table below were funded with cash on hand. The acquisition of GGY will allow MA to provide an industry-leading enterprise risk offering for global life insurers and reinsurers.
The table below details the total consideration relating to the acquisition:
Cash paid at closing | $ | 83.4 | |||||
Additional consideration paid to sellers in the third quarter 2016(1) | 3.1 | ||||||
Total consideration | $ | 86.5 | |||||
(1) Represents additional consideration paid to the sellers for amounts withheld at closing pending the completion of certain administrative matters |
Shown below is the purchase price allocation, which summarizes the fair value of the assets and liabilities assumed, at the date of acquisition:
Current assets | $ | 11.7 | ||||
Property and equipment, net | 2.0 | |||||
Indemnification assets | 1.5 | |||||
Intangible assets: | ||||||
Trade name (19 year weighted average life) | $ | 3.7 | ||||
Client relationships (21 year weighted average life) | 13.8 | |||||
Software (7 year weighted average life) | 16.6 | |||||
Total intangible assets (14 year weighted average life) | 34.1 | |||||
Goodwill | 59.4 | |||||
Liabilities | (22.2) | |||||
Net assets acquired | $ | 86.5 |
Current assets in the table above include acquired cash of $7.5 million. Additionally, current assets include accounts receivable of $2.9 million. Goodwill, which has been assigned to the MA segment, is not deductible for tax.
In connection with the acquisition, the Company assumed liabilities relating to UTBs and certain other tax exposures which are included in the liabilities assumed in the table above. The sellers have contractually indemnified the Company against any potential payments that may have to be made regarding these amounts. Accordingly, the Company carries an indemnification asset on its consolidated balance sheet at December 31, 2016.
The Company incurred $0.9 million of costs directly related to the GGY acquisition of which $0.6 million was incurred in 2015 and $0.3 million was incurred in the first quarter of 2016. These costs are recorded within selling, general and administrative expenses in the Company’s consolidated statements of operations.
GGY is part of the ERS reporting unit for purposes of the Company’s annual goodwill impairment assessment.
BlackBox Logic
On December 9, 2015, a subsidiary of the Company acquired the RMBS data and analytics business of BlackBox Logic. The aggregate purchase price was not material and the near term impact to the Company’s operations and cash flows is not expected to be material. This business operates in the MA reportable segment and goodwill related to this acquisition has been allocated to the RD&A reporting unit.
Equilibrium
On May 21, 2015, a subsidiary of the Company acquired 100% of Equilibrium, a provider of credit rating and research services in Peru and Panama. The aggregate purchase price was not material and the near term impact to the Company’s operations and cash flows is not expected to be material. Equilibrium operates in the MIS reportable segment and goodwill related to this acquisition has been allocated to the MIS reporting unit.
Lewtan Technologies
On October 27, 2014, a subsidiary of the Company acquired 100% of Lewtan Technologies, a leading provider of analytical tools and data for the global structured finance market. The acquisition of Lewtan bolstered MA’s Strctured Analytics and Valuations (SAV) business within its RD&A LOB, which provides an extensive data and analytics library for securitized assets. The aggregate purchase price is not material. Lewtan operates in the RD&A LOB of MA and goodwill related to this acquisition was allocated to the RD&A reporting unit.
WebEquity Solutions, LLC
On July 17, 2014, a subsidiary of the Company acquired 100% of WebEquity Solutions, LLC, a leading provider of cloud-based loan origination solutions for financial institutions. The payment of $130.5 million was funded with cash on hand. This acquisition enhanced MA’s risk management product portfolio.
Shown below is the purchase price allocation, which summarizes the fair value of the assets and liabilities assumed, at the date of the acquisition:
Current assets | $ | 3.0 | ||||
Property and equipment, net | 2.3 | |||||
Intangible assets: | ||||||
Client relationships (18 year weighted average life) | $ | 42.8 | ||||
Software (15 year weighted average life) | 11.5 | |||||
Trade name (4 year weighted average life) | 0.5 | |||||
Total intangible assets (17 year weighted average life) | 54.8 | |||||
Goodwill | 77.6 | |||||
Liabilities assumed | (7.2) | |||||
Net assets acquired | $ | 130.5 |
The acquired goodwill, which has been assigned to the MA segment, will be deductible for tax.
As of the date of the acquisition, WebEquity is part of the ERS reporting unit.
ICRA Limited
On June 26, 2014, a subsidiary of the Company acquired 2,154,722 additional shares of ICRA Limited, a publicly traded company in India. ICRA is a leading provider of credit ratings and research in India and extends MIS’s reach in the growing domestic debt market in India as well as other emerging markets in the region. The acquisition of the additional shares increased Moody’s ownership stake in ICRA from 28.5% to just over 50%, resulting in a controlling interest in ICRA. Moody’s consolidates ICRA’s financial statements on a three-month lag.
Prior to the acquisition of the additional shares, Moody’s accounted for its investment in ICRA on an equity basis whereby the Company recorded its proportional share of the investment’s net income or loss as part of other non-operating income (expense), net. The acquisition of the additional shares has resulted in the Company consolidating ICRA into its financial statements. As a result of this consolidation and in accordance with ASC 805, the carrying value of the Company’s equity investment in ICRA was remeasured to fair value as of the acquisition date resulting in a pre-tax gain of $102.8 million ($78.5 million after-tax) in the second quarter of 2014. The fair value of the Company’s equity investment was based on ICRA’s quoted market price on the date of acquisition.
The table below details the total consideration relating to the ICRA step-acquisition:
Cash paid | $ | 86.0 | |||||
Fair value of equity interest in ICRA prior to obtaining a controlling interest | 124.9 | ||||||
Total consideration | $ | 210.9 |
The cash paid in the table above was funded above using Moody's non-U.S. cash on hand.
Shown below is the purchase price allocation, which summarizes the fair value of the assets and liabilities assumed, at the date of acquisition:
Current assets | $ | 25.4 | |||
Property and equipment, net | 15.1 | ||||
Intangible assets: | |||||
Trade name (36 year weighted average life) | $ | 46.8 | |||
Client relationships (19 year weighted average life) | 33.8 | ||||
Other (17 year weighted average life)* | 18.3 | ||||
Total intangible assets (26 year weighted average life) | 98.9 | ||||
Goodwill | 296.7 | ||||
Other assets | 56.3 | ||||
Liabilities | (62.7) | ||||
Fair value of non-controlling interest assumed | (218.8) | ||||
Net assets acquired | $ | 210.9 | |||
* Primarily consists of acquired technical know-how and ratings methodologies |
Current assets include acquired cash of approximately $5 million. Additionally, current assets includes gross accounts receivable of approximately $14 million, of which an immaterial amount is not expected to be collectible. Goodwill, which has been assigned to the MIS segment, is not deductible for tax.
The fair value of the non-controlling interest was determined based on the quoted market price per share of ICRA on the date that the Company acquired the controlling stake.
ICRA operates at its own reporting unit for purposes of the Company’s annual goodwill impairment assessment.
In the fourth quarter of 2016, ICRA divested its interest in ICTEAS, which is part of the MIS Other LOB, and resulted in an immaterial gain. The impact of ICTEAS’s operations, financial position and cash flows were not material to Moody’s.
|
Cash paid at closing | $ | 83.4 | |||||
Additional consideration paid to sellers in the third quarter 2016(1) | 3.1 | ||||||
Total consideration | $ | 86.5 | |||||
(1) Represents additional consideration paid to the sellers for amounts withheld at closing pending the completion of certain administrative matters |
Current assets | $ | 11.7 | ||||
Property and equipment, net | 2.0 | |||||
Indemnification assets | 1.5 | |||||
Intangible assets: | ||||||
Trade name (19 year weighted average life) | $ | 3.7 | ||||
Client relationships (21 year weighted average life) | 13.8 | |||||
Software (7 year weighted average life) | 16.6 | |||||
Total intangible assets (14 year weighted average life) | 34.1 | |||||
Goodwill | 59.4 | |||||
Liabilities | (22.2) | |||||
Net assets acquired | $ | 86.5 |
Current assets | $ | 3.0 | ||||
Property and equipment, net | 2.3 | |||||
Intangible assets: | ||||||
Client relationships (18 year weighted average life) | $ | 42.8 | ||||
Software (15 year weighted average life) | 11.5 | |||||
Trade name (4 year weighted average life) | 0.5 | |||||
Total intangible assets (17 year weighted average life) | 54.8 | |||||
Goodwill | 77.6 | |||||
Liabilities assumed | (7.2) | |||||
Net assets acquired | $ | 130.5 |
Cash paid | $ | 86.0 | |||||
Fair value of equity interest in ICRA prior to obtaining a controlling interest | 124.9 | ||||||
Total consideration | $ | 210.9 |
Current assets | $ | 25.4 | |||
Property and equipment, net | 15.1 | ||||
Intangible assets: | |||||
Trade name (36 year weighted average life) | $ | 46.8 | |||
Client relationships (19 year weighted average life) | 33.8 | ||||
Other (17 year weighted average life)* | 18.3 | ||||
Total intangible assets (26 year weighted average life) | 98.9 | ||||
Goodwill | 296.7 | ||||
Other assets | 56.3 | ||||
Liabilities | (62.7) | ||||
Fair value of non-controlling interest assumed | (218.8) | ||||
Net assets acquired | $ | 210.9 | |||
* Primarily consists of acquired technical know-how and ratings methodologies |
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NOTE 8 GOODWILL AND OTHER ACQUIRED INTANGIBLE ASSETS
The following table summarizes the activity in goodwill:
Year Ended December 31, 2016 | |||||||||||||||||||||||||||
MIS | MA | Consolidated | |||||||||||||||||||||||||
Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | |||||||||||||||||||
Balance at beginning of year | $ | 284.4 | $ | - | $ | 284.4 | $ | 704.1 | $ | (12.2) | $ | 691.9 | $ | 988.5 | $ | (12.2) | $ | 976.3 | |||||||||
Additions/adjustments | - | - | - | 61.0 | - | 61.0 | 61.0 | - | 61.0 | ||||||||||||||||||
Goodwill derecognized upon sale of subsidiary | (3.2) | - | (3.2) | - | - | - | (3.2) | - | (3.2) | ||||||||||||||||||
Foreign currency translation adjustments | (4.2) | - | (4.2) | (6.3) | - | (6.3) | (10.5) | - | (10.5) | ||||||||||||||||||
Ending balance | $ | 277.0 | $ | - | $ | 277.0 | $ | 758.8 | $ | (12.2) | $ | 746.6 | $ | 1,035.8 | $ | (12.2) | $ | 1,023.6 | |||||||||
Year Ended December 31, 2015 | |||||||||||||||||||||||||||
MIS | MA | Consolidated | |||||||||||||||||||||||||
Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | |||||||||||||||||||
Balance at beginning of year | $ | 298.7 | $ | - | $ | 298.7 | $ | 734.6 | $ | (12.2) | $ | 722.4 | $ | 1,033.3 | $ | (12.2) | $ | 1,021.1 | |||||||||
Additions/adjustments | 3.7 | - | 3.7 | 5.0 | - | 5.0 | 8.7 | - | 8.7 | ||||||||||||||||||
Foreign currency translation adjustments | (18.0) | - | (18.0) | (35.5) | - | (35.5) | (53.5) | - | (53.5) | ||||||||||||||||||
Ending balance | $ | 284.4 | $ | - | $ | 284.4 | $ | 704.1 | $ | (12.2) | $ | 691.9 | $ | 988.5 | $ | (12.2) | $ | 976.3 |
The 2016 goodwill derecognized for the MIS segment in the table above relates to the divestiture of ICTEAS in the fourth quarter of 2016 as more fully discussed in Note 7. The 2016 additions/adjustments for the MA segment in the table above primarily relate to the acquisition of GGY. The 2015 additions/adjustments for the MIS segment in the table above relate to the acquisition of Equilibrium. The 2015 additions/adjustments for the MA segment primarily reflect an adjustment to an indemnification asset recognized as part of the Copal acquisition, goodwill acquired from the acquisition of a business from BlackBox Logic and adjustments to deferred revenue balances and deferred tax assets recognized as part of the Lewtan acquisition.
The accumulated impairment charge in the table above reflects an impairment charge recognized in 2012 relating to the FSTC reporting unit within MA. This impairment charge reflected a contraction in spending for training and certification services for many individuals and global financial institutions in 2012 due to macroeconomic uncertainties at the time. The fair value of the FSTC reporting unit utilized in this impairment assessment was estimated using a discounted cash flow methodology and comparable public company and precedent transaction multiples.
Acquired intangible assets and related amortization consisted of:
December 31, | |||||||
2016 | 2015 | ||||||
Customer relationships | $ | 310.1 | $ | 298.4 | |||
Accumulated amortization | (124.4) | (110.0) | |||||
Net customer relationships | 185.7 | 188.4 | |||||
Trade secrets | 29.9 | 29.7 | |||||
Accumulated amortization | (25.6) | (23.1) | |||||
Net trade secrets | 4.3 | 6.6 | |||||
Software | 87.7 | 74.7 | |||||
Accumulated amortization | (54.9) | (47.7) | |||||
Net software | 32.8 | 27.0 | |||||
Trade names | 75.3 | 72.4 | |||||
Accumulated amortization | (19.9) | (16.2) | |||||
Net trade names | 55.4 | 56.2 | |||||
Other (1) | 43.5 | 44.3 | |||||
Accumulated amortization | (25.3) | (23.4) | |||||
Net other | 18.2 | 20.9 | |||||
Total | $ | 296.4 | $ | 299.1 | |||
(1) Other intangible assets primarily consist of databases, covenants not to compete, and acquired ratings methodologies and models. |
Amortization expense relating to acquired intangible assets is as follows:
Year Ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
Amortization expense | $ | 34.2 | $ | 31.9 | $ | 28.4 |
Estimated future annual amortization expense for intangible assets subject to amortization is as follows:
Year Ending December 31, | |||
2017 | $ | 31.4 | |
2018 | 26.0 | ||
2019 | 22.9 | ||
2020 | 21.2 | ||
2021 | 20.5 | ||
Thereafter | 174.4 | ||
Total estimated future amortization | $ | 296.4 |
Amortizable intangible assets are reviewed for recoverability whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. For all intangible assets, there were no such events or changes during 2016, 2015 or 2014 that would indicate that the carrying amount of amortizable intangible assets in any of the Company’s reporting units may not be recoverable
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Year Ended December 31, 2016 | |||||||||||||||||||||||||||
MIS | MA | Consolidated | |||||||||||||||||||||||||
Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | |||||||||||||||||||
Balance at beginning of year | $ | 284.4 | $ | - | $ | 284.4 | $ | 704.1 | $ | (12.2) | $ | 691.9 | $ | 988.5 | $ | (12.2) | $ | 976.3 | |||||||||
Additions/adjustments | - | - | - | 61.0 | - | 61.0 | 61.0 | - | 61.0 | ||||||||||||||||||
Goodwill derecognized upon sale of subsidiary | (3.2) | - | (3.2) | - | - | - | (3.2) | - | (3.2) | ||||||||||||||||||
Foreign currency translation adjustments | (4.2) | - | (4.2) | (6.3) | - | (6.3) | (10.5) | - | (10.5) | ||||||||||||||||||
Ending balance | $ | 277.0 | $ | - | $ | 277.0 | $ | 758.8 | $ | (12.2) | $ | 746.6 | $ | 1,035.8 | $ | (12.2) | $ | 1,023.6 | |||||||||
Year Ended December 31, 2015 | |||||||||||||||||||||||||||
MIS | MA | Consolidated | |||||||||||||||||||||||||
Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | Gross goodwill | Accumulated impairment charge | Net goodwill | |||||||||||||||||||
Balance at beginning of year | $ | 298.7 | $ | - | $ | 298.7 | $ | 734.6 | $ | (12.2) | $ | 722.4 | $ | 1,033.3 | $ | (12.2) | $ | 1,021.1 | |||||||||
Additions/adjustments | 3.7 | - | 3.7 | 5.0 | - | 5.0 | 8.7 | - | 8.7 | ||||||||||||||||||
Foreign currency translation adjustments | (18.0) | - | (18.0) | (35.5) | - | (35.5) | (53.5) | - | (53.5) | ||||||||||||||||||
Ending balance | $ | 284.4 | $ | - | $ | 284.4 | $ | 704.1 | $ | (12.2) | $ | 691.9 | $ | 988.5 | $ | (12.2) | $ | 976.3 |
December 31, | |||||||
2016 | 2015 | ||||||
Customer relationships | $ | 310.1 | $ | 298.4 | |||
Accumulated amortization | (124.4) | (110.0) | |||||
Net customer relationships | 185.7 | 188.4 | |||||
Trade secrets | 29.9 | 29.7 | |||||
Accumulated amortization | (25.6) | (23.1) | |||||
Net trade secrets | 4.3 | 6.6 | |||||
Software | 87.7 | 74.7 | |||||
Accumulated amortization | (54.9) | (47.7) | |||||
Net software | 32.8 | 27.0 | |||||
Trade names | 75.3 | 72.4 | |||||
Accumulated amortization | (19.9) | (16.2) | |||||
Net trade names | 55.4 | 56.2 | |||||
Other (1) | 43.5 | 44.3 | |||||
Accumulated amortization | (25.3) | (23.4) | |||||
Net other | 18.2 | 20.9 | |||||
Total | $ | 296.4 | $ | 299.1 | |||
(1) Other intangible assets primarily consist of databases, covenants not to compete, and acquired ratings methodologies and models. |
Year Ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
Amortization expense | $ | 34.2 | $ | 31.9 | $ | 28.4 |
Year Ending December 31, | |||
2017 | $ | 31.4 | |
2018 | 26.0 | ||
2019 | 22.9 | ||
2020 | 21.2 | ||
2021 | 20.5 | ||
Thereafter | 174.4 | ||
Total estimated future amortization | $ | 296.4 |
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NOTE 9 RESTRUCTURING
In September 2016, the Company approved a restructuring plan relating to cost management initiatives in the MIS segment as well as in certain corporate overhead functions. This restructuring plan consists solely of headcount reductions, which when combined with an immaterial restructuring in the first half of 2016, represented approximately 1% of the Company’s workforce. The entire charge for these actions will result in cash outlays that will be paid out over the next nine months. The cumulative amount of expense incurred from inception through December 31, 2016 for these actions was $12.0 million. Actions under these plans were substantially complete at September 30, 2016.
Total expenses included in the accompanying consolidated statements of operations are as follows:
Year Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
Restructuring | $ | 12.0 | $ | - | $ | - |
Changes to the restructuring liability during the first twelve months of 2016 were as follows:
Employee Termination Costs | |||||
Severance | |||||
Balance at January 1, 2016 | $ | - | |||
Cost incurred and adjustments | 12.0 | ||||
Cash payments | (5.7) | ||||
Balance at December 31, 2016 | $ | 6.3 |
As of December 31, 2016 the remaining restructuring liability of $6.3 million relating to severance is expected to be paid out during the year ending December 31, 2017. This liability is recorded within accounts payable and accrued liabilities in the Company’s consolidated balance sheet at December 31, 2016.
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Year Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
Restructuring | $ | 12.0 | $ | - | $ | - |
Employee Termination Costs | |||||
Severance | |||||
Balance at January 1, 2016 | $ | - | |||
Cost incurred and adjustments | 12.0 | ||||
Cash payments | (5.7) | ||||
Balance at December 31, 2016 | $ | 6.3 |
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NOTE 10 FAIR VALUE
The table below presents information about items which are carried at fair value on a recurring basis at December 31, 2016 and December 31, 2015:
Fair Value Measurement as of December 31, 2016 | ||||||||||||
Description | Balance | Level 1 | Level 2 | |||||||||
Assets: | ||||||||||||
Derivatives (a) | $ | 7.6 | $ | - | $ | 7.6 | ||||||
Money market mutual funds | 189.0 | 189.0 | - | |||||||||
Fixed maturity and open ended mutual funds | 32.6 | 32.6 | - | |||||||||
Total | $ | 229.2 | $ | 221.6 | $ | 7.6 | ||||||
Liabilities: | ||||||||||||
Derivatives (a) | $ | 5.4 | $ | - | $ | 5.4 | ||||||
Total | $ | 5.4 | $ | - | $ | 5.4 | ||||||
Fair Value Measurement as of December 31, 2015 | ||||||||||||
Description | Balance | Level 1 | Level 2 | |||||||||
Assets: | ||||||||||||
Derivatives (a) | $ | 12.6 | $ | - | $ | 12.6 | ||||||
Money market mutual funds | 188.3 | 188.3 | - | |||||||||
Fixed maturity and open ended mutual funds | 31.9 | 31.9 | - | |||||||||
Total | $ | 232.8 | $ | 220.2 | $ | 12.6 | ||||||
Liabilities: | ||||||||||||
Derivatives (a) | $ | 10.4 | $ | - | $ | 10.4 | ||||||
Total | $ | 10.4 | $ | - | $ | 10.4 | ||||||
(a) Represents FX forwards on certain assets and liabilities and on net investments in certain foreign subsidiaries as well as interest rate swaps and cross-currency swaps as more fully described in Note 5 to the financial statements. | ||||||||||||
The following table summarizes the changes in the fair value of the Company’s Level 3 liabilities:
Changes in Contingent Consideration for Years Ended December 31, | ||||||||||
2015 | 2014 | |||||||||
Balance as of January 1 | $ | 2.1 | $ | 17.5 | ||||||
Contingent consideration payments | (1.9) | (16.5) | ||||||||
Losses included in earnings | - | 1.3 | ||||||||
Foreign currency translation adjustments | (0.2) | (0.2) | ||||||||
Balance as of December 31 | $ | - | $ | 2.1 |
The following are descriptions of the methodologies utilized by the Company to estimate the fair value of its derivative contracts, fixed maturity plans, money market mutual funds, and contingent consideration obligations:
Derivatives:
In determining the fair value of the derivative contracts in the table above, the Company utilizes industry standard valuation models. Where applicable, these models project future cash flows and discount the future amounts to a present value using spot rates, forward points, currency volatilities, interest rates as well as the risk of non-performance of the Company and the counterparties with whom it has derivative contracts. The Company established strict counterparty credit guidelines and only enters into transactions with financial institutions that adhere to these guidelines. Accordingly, the risk of counterparty default is deemed to be minimal.
Fixed maturity and open ended mutual funds:
The fixed maturity mutual funds and open ended mutual funds primarily represent exchange traded funds in India and are classified as securities available-for-sale. Accordingly, any unrealized gains and losses are recognized through OCI until the instruments mature or are sold.
Money market mutual funds:
The money market mutual funds represent publicly traded funds with a stable $1 net asset value.
Contingent Consideration:
During the third quarter of 2015, the Company settled a contingent consideration obligation of 2.5 million Canadian dollars related to the acquisition of CSI that was based on certain non-financial metrics set forth in the acquisition agreement. Prior to the settlement of this obligation, the Company utilized a discounted cash flow methodology to value this obligation. These obligations were measured using Level 3 inputs as defined in the ASC.
For certain of the contingent consideration obligations relating to the acquisition of Copal, a portion of the contingent cash payments were based on revenue and EBITDA growth for certain of the Copal entities. This growth was calculated by comparing revenue and EBITDA in the year immediately prior to the exercise of the put/call option to acquire the remaining 33% ownership interest of Copal Partners Limited, to revenue and EBITDA in Copal’s fiscal year ended March 31, 2011. Payments of $12.2 million under this arrangement were made in the fourth quarter of 2014 pursuant to the Company exercising its call option to acquire the remaining shares of Copal Amba. The Company had utilized discounted cash flow methodologies to value these obligations prior to their settlement in 2014. The expected future cash flows for these obligations were discounted using a risk-free interest rate plus a credit spread based on the option adjusted spread of the Company’s publicly traded debt as of the valuation date plus sovereign and size risk premiums. The most significant unobservable input involved in the measurement of these obligations were the projected future financial results of the applicable Copal Amba entities.
For the contingent consideration obligations relating to the acquisition of Amba, the payment was based on the acquired entity achieving a revenue target for its fiscal year ended March 31, 2014 which was met resulting in a $4.3 million payment in 2014.
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Fair Value Measurement as of December 31, 2016 | ||||||||||||
Description | Balance | Level 1 | Level 2 | |||||||||
Assets: | ||||||||||||
Derivatives (a) | $ | 7.6 | $ | - | $ | 7.6 | ||||||
Money market mutual funds | 189.0 | 189.0 | - | |||||||||
Fixed maturity and open ended mutual funds | 32.6 | 32.6 | - | |||||||||
Total | $ | 229.2 | $ | 221.6 | $ | 7.6 | ||||||
Liabilities: | ||||||||||||
Derivatives (a) | $ | 5.4 | $ | - | $ | 5.4 | ||||||
Total | $ | 5.4 | $ | - | $ | 5.4 | ||||||
Fair Value Measurement as of December 31, 2015 | ||||||||||||
Description | Balance | Level 1 | Level 2 | |||||||||
Assets: | ||||||||||||
Derivatives (a) | $ | 12.6 | $ | - | $ | 12.6 | ||||||
Money market mutual funds | 188.3 | 188.3 | - | |||||||||
Fixed maturity and open ended mutual funds | 31.9 | 31.9 | - | |||||||||
Total | $ | 232.8 | $ | 220.2 | $ | 12.6 | ||||||
Liabilities: | ||||||||||||
Derivatives (a) | $ | 10.4 | $ | - | $ | 10.4 | ||||||
Total | $ | 10.4 | $ | - | $ | 10.4 | ||||||
(a) Represents FX forwards on certain assets and liabilities and on net investments in certain foreign subsidiaries as well as interest rate swaps and cross-currency swaps as more fully described in Note 5 to the financial statements. | ||||||||||||
Changes in Contingent Consideration for Years Ended December 31, | ||||||||||
2015 | 2014 | |||||||||
Balance as of January 1 | $ | 2.1 | $ | 17.5 | ||||||
Contingent consideration payments | (1.9) | (16.5) | ||||||||
Losses included in earnings | - | 1.3 | ||||||||
Foreign currency translation adjustments | (0.2) | (0.2) | ||||||||
Balance as of December 31 | $ | - | $ | 2.1 |
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NOTE 11 DETAIL OF CERTAIN BALANCE SHEET INFORMATION
The following tables contain additional detail related to certain balance sheet captions:
December 31, | ||||||
2016 | 2015 | |||||
Other current assets: | ||||||
Prepaid taxes | $ | 47.0 | $ | 83.3 | ||
Prepaid expenses | 65.7 | 66.9 | ||||
Other | 28.1 | 29.4 | ||||
Total other current assets | $ | 140.8 | $ | 179.6 | ||
December 31, | ||||||
2016 | 2015 | |||||
Other assets: | ||||||
Investments in joint ventures | $ | 26.3 | $ | 28.7 | ||
Deposits for real-estate leases | 10.8 | 11.4 | ||||
Indemnification assets related to acquisitions | 16.5 | 19.2 | ||||
Mutual funds and fixed deposits | 32.7 | 55.0 | ||||
Other | 25.9 | 26.1 | ||||
Total other assets | $ | 112.2 | $ | 140.4 | ||
December 31, | ||||||
2016 | 2015 | |||||
Accounts payable and accrued liabilities: | ||||||
Salaries and benefits | $ | 89.3 | $ | 83.0 | ||
Incentive compensation | 151.1 | 137.2 | ||||
Accrued settlement charge | 863.8 | - | ||||
Customer credits, advanced payments and advanced billings | 28.4 | 24.6 | ||||
Self-insurance reserves | 11.1 | 19.7 | ||||
Dividends | 78.5 | 78.2 | ||||
Professional service fees | 40.4 | 54.5 | ||||
Interest accrued on debt | 59.2 | 59.4 | ||||
Accounts payable | 28.4 | 22.2 | ||||
Income taxes (see Note 15) | 16.8 | 11.5 | ||||
Restructuring (see Note 9) | 6.3 | - | ||||
Pension and other retirement employee benefits (see Note 13) | 6.1 | 6.2 | ||||
Other | 64.9 | 70.1 | ||||
Total accounts payable and accrued liabilities | $ | 1,444.3 | $ | 566.6 | ||
December 31, | ||||||
2016 | 2015 | |||||
Other liabilities: | ||||||
Pension and other retirement employee benefits (see Note 13) | $ | 264.1 | $ | 261.7 | ||
Deferred rent-non-current portion | 98.3 | 98.4 | ||||
Interest accrued on UTPs | 34.1 | 27.9 | ||||
Legacy and other tax matters | 1.2 | 1.7 | ||||
Other | 27.5 | 27.5 | ||||
Total other liabilities | $ | 425.2 | $ | 417.2 |
Changes in the Company’s self-insurance reserves for claims insured by the Company’s wholly-owned insurance subsidiary, which primarily relate to legal defense costs for claims from prior years, are as follows:
Year Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
Balance January 1, | $ | 19.7 | $ | 21.5 | $ | 27.6 | |||
Accruals (reversals), net | 12.1 | 22.2 | 5.8 | ||||||
Payments | (20.7) | (24.0) | (11.9) | ||||||
Balance December 31, | $ | 11.1 | $ | 19.7 | $ | 21.5 |
Redeemable Noncontrolling Interest:
In connection with the acquisition of Copal, the Company and the non-controlling shareholders entered into a put/call option agreement whereby the Company had the option to purchase from the non-controlling shareholders and the non-controlling shareholders had the option to sell to the Company the remaining 33% ownership interest of Copal Partners Limited based on a strike price to be calculated on pre-determined formulas using a combination of revenue and EBITDA multiples when exercised. The value of the estimated put/call option strike price on the date of acquisition was based on a Monte Carlo simulation model. This model contemplated multiple scenarios which simulated certain of Copal’s revenue, EBITDA margins and equity values to estimate the present value of the expected strike price of the option. In connection with the acquisition of Amba in December 2013, which was combined with Copal to form the Copal Amba operating segment and reporting unit, the aforementioned revenue and EBITDA multiples set forth in the put/call option agreement were modified to include the results of Amba. The option was subject to a minimum exercise price of $46 million. There was no limit as to the maximum amount of the strike price on the put/call option.
In the fourth quarter of 2014, the Company exercised its call option to acquire the remaining interest of Copal Amba.
The following table shows changes in the redeemable noncontrolling interest related to the acquisition of Copal Amba:
Year Ended December 31, | |||||||
2014 | |||||||
Redeemable Noncontrolling Interest | |||||||
Balance January 1, | $ | 80.0 | |||||
Net earnings | 9.3 | ||||||
Dividends | (4.9) | ||||||
Redemption of noncontrolling interest | (183.8) | ||||||
Adjustment to redemption value (1) | 99.4 | ||||||
Balance December 31, | $ | - | |||||
(1) The adjustment to the redemption value in the year ended December 31, 2014 reflects the aforementioned revisions to the revenue and EBITDA multiples pursuant to the amendment of the put/call agreement which occurred contemporaneously with the acquisition of Amba coupled with growth in the Copal Amba reporting unit. These adjustments were recorded with a corresponding reduction to capital surplus. |
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December 31, | ||||||
2016 | 2015 | |||||
Other current assets: | ||||||
Prepaid taxes | $ | 47.0 | $ | 83.3 | ||
Prepaid expenses | 65.7 | 66.9 | ||||
Other | 28.1 | 29.4 | ||||
Total other current assets | $ | 140.8 | $ | 179.6 | ||
December 31, | ||||||
2016 | 2015 | |||||
Other assets: | ||||||
Investments in joint ventures | $ | 26.3 | $ | 28.7 | ||
Deposits for real-estate leases | 10.8 | 11.4 | ||||
Indemnification assets related to acquisitions | 16.5 | 19.2 | ||||
Mutual funds and fixed deposits | 32.7 | 55.0 | ||||
Other | 25.9 | 26.1 | ||||
Total other assets | $ | 112.2 | $ | 140.4 | ||
December 31, | ||||||
2016 | 2015 | |||||
Accounts payable and accrued liabilities: | ||||||
Salaries and benefits | $ | 89.3 | $ | 83.0 | ||
Incentive compensation | 151.1 | 137.2 | ||||
Accrued settlement charge | 863.8 | - | ||||
Customer credits, advanced payments and advanced billings | 28.4 | 24.6 | ||||
Self-insurance reserves | 11.1 | 19.7 | ||||
Dividends | 78.5 | 78.2 | ||||
Professional service fees | 40.4 | 54.5 | ||||
Interest accrued on debt | 59.2 | 59.4 | ||||
Accounts payable | 28.4 | 22.2 | ||||
Income taxes (see Note 15) | 16.8 | 11.5 | ||||
Restructuring (see Note 9) | 6.3 | - | ||||
Pension and other retirement employee benefits (see Note 13) | 6.1 | 6.2 | ||||
Other | 64.9 | 70.1 | ||||
Total accounts payable and accrued liabilities | $ | 1,444.3 | $ | 566.6 | ||
December 31, | ||||||
2016 | 2015 | |||||
Other liabilities: | ||||||
Pension and other retirement employee benefits (see Note 13) | $ | 264.1 | $ | 261.7 | ||
Deferred rent-non-current portion | 98.3 | 98.4 | ||||
Interest accrued on UTPs | 34.1 | 27.9 | ||||
Legacy and other tax matters | 1.2 | 1.7 | ||||
Other | 27.5 | 27.5 | ||||
Total other liabilities | $ | 425.2 | $ | 417.2 |
Year Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
Balance January 1, | $ | 19.7 | $ | 21.5 | $ | 27.6 | |||
Accruals (reversals), net | 12.1 | 22.2 | 5.8 | ||||||
Payments | (20.7) | (24.0) | (11.9) | ||||||
Balance December 31, | $ | 11.1 | $ | 19.7 | $ | 21.5 |
Year Ended December 31, | |||||||
2014 | |||||||
Redeemable Noncontrolling Interest | |||||||
Balance January 1, | $ | 80.0 | |||||
Net earnings | 9.3 | ||||||
Dividends | (4.9) | ||||||
Redemption of noncontrolling interest | (183.8) | ||||||
Adjustment to redemption value (1) | 99.4 | ||||||
Balance December 31, | $ | - | |||||
(1) The adjustment to the redemption value in the year ended December 31, 2014 reflects the aforementioned revisions to the revenue and EBITDA multiples pursuant to the amendment of the put/call agreement which occurred contemporaneously with the acquisition of Amba coupled with growth in the Copal Amba reporting unit. These adjustments were recorded with a corresponding reduction to capital surplus. |
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NOTE 12. COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME
The following table provides details about the reclassifications out of AOCI:
Year Ended December 31, | Affected line in the consolidated statement of operations | ||||||||||||||
2016 | 2015 | 2014 | |||||||||||||
Gains (losses) on currency translation adjustments | |||||||||||||||
Liquidation/sale of foreign subsidiary | $ | 36.6 | $ | 0.1 | $ | - | Other non-operating income (expense), net | ||||||||
Loss on foreign currency translation adjustment pursuant to ICRA step-acquisition | - | - | (4.4) | ICRA Gain | |||||||||||
Total gains (losses) on currency translation adjustments | 36.6 | 0.1 | (4.4) | ||||||||||||
Losses on cash flow hedges | |||||||||||||||
Cross-currency swap | (6.0) | - | - | Other non-operating income (expense), net | |||||||||||
Income tax effect of item above | 2.3 | - | - | Provision for income taxes | |||||||||||
Losses on cash flow hedges | (3.7) | - | - | ||||||||||||
Gains on available for sale securities: | |||||||||||||||
Gains on available for sale securities | - | 0.9 | 0.1 | Other income | |||||||||||
Income tax effect of item above | - | - | - | Provision for income taxes | |||||||||||
Total gains on available for sale securities | - | 0.9 | 0.1 | ||||||||||||
Pension and other retirement benefits | |||||||||||||||
Amortization of actuarial losses and prior service costs included in net income | (5.8) | (8.5) | (4.7) | Operating expense | |||||||||||
Amortization of actuarial losses and prior service costs included in net income | (3.9) | (5.0) | (2.6) | SG&A expense | |||||||||||
Total before income taxes | (9.7) | (13.5) | (7.3) | ||||||||||||
Income tax effect of item above | 3.7 | 5.2 | 2.8 | Provision for income taxes | |||||||||||
Total pension and other retirement benefits | (6.0) | (8.3) | (4.5) | ||||||||||||
Total losses included in Net Income attributable to reclassifications out of AOCI | $ | 26.9 | $ | (7.3) | $ | (8.8) |
The following table shows changes in AOCI by component (net of tax):
Year Ended December 31, 2016 | ||||||||||||||||||
Pension and Other Retirement Benefits | Gains / (Losses) on Cash Flow Hedges | Foreign Currency Translation Adjustments | Gains on Available for Sale Securities | Total | ||||||||||||||
Balance December 31, 2015 | $ | (85.7) | $ | (1.1) | $ | (256.0) | $ | 3.3 | $ | (339.5) | ||||||||
Other comprehensive income/(loss) before reclassifications | 0.2 | (0.9) | 2.4 | (0.2) | 1.5 | |||||||||||||
Amounts reclassified from AOCI | 6.0 | 3.7 | (36.6) | - | (26.9) | |||||||||||||
Other comprehensive income/(loss) | 6.2 | 2.8 | (34.2) | (0.2) | (25.4) | |||||||||||||
Balance December 31, 2016 | $ | (79.5) | $ | 1.7 | $ | (290.2) | $ | 3.1 | $ | (364.9) | ||||||||
Year Ended December 31, 2015 | ||||||||||||||||||
Balance December 31, 2014 | $ | (105.4) | $ | - | $ | (130.7) | $ | 0.9 | $ | (235.2) | ||||||||
Other comprehensive income/(loss) before reclassifications | 11.4 | (1.1) | (125.2) | 3.3 | (111.6) | |||||||||||||
Amounts reclassified from AOCI | 8.3 | - | (0.1) | (0.9) | 7.3 | |||||||||||||
Other comprehensive income/(loss) | 19.7 | (1.1) | (125.3) | 2.4 | (104.3) | |||||||||||||
Balance December 31, 2015 | $ | (85.7) | $ | (1.1) | $ | (256.0) | $ | 3.3 | $ | (339.5) | ||||||||
Year Ended December 31, 2014 | ||||||||||||||||||
Balance December 31, 2013 | $ | (53.2) | $ | - | $ | (1.4) | $ | - | $ | (54.6) | ||||||||
Other comprehensive income/(loss) before reclassifications | (56.7) | - | (133.7) | 1.0 | (189.4) | |||||||||||||
Amounts reclassified from AOCI | 4.5 | - | 4.4 | (0.1) | 8.8 | |||||||||||||
Other comprehensive income/(loss) | (52.2) | - | (129.3) | 0.9 | (180.6) | |||||||||||||
Balance December 31, 2014 | $ | (105.4) | $ | - | $ | (130.7) | $ | 0.9 | $ | (235.2) |
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Year Ended December 31, | Affected line in the consolidated statement of operations | ||||||||||||||
2016 | 2015 | 2014 | |||||||||||||
Gains (losses) on currency translation adjustments | |||||||||||||||
Liquidation/sale of foreign subsidiary | $ | 36.6 | $ | 0.1 | $ | - | Other non-operating income (expense), net | ||||||||
Loss on foreign currency translation adjustment pursuant to ICRA step-acquisition | - | - | (4.4) | ICRA Gain | |||||||||||
Total gains (losses) on currency translation adjustments | 36.6 | 0.1 | (4.4) | ||||||||||||
Losses on cash flow hedges | |||||||||||||||
Cross-currency swap | (6.0) | - | - | Other non-operating income (expense), net | |||||||||||
Income tax effect of item above | 2.3 | - | - | Provision for income taxes | |||||||||||
Losses on cash flow hedges | (3.7) | - | - | ||||||||||||
Gains on available for sale securities: | |||||||||||||||
Gains on available for sale securities | - | 0.9 | 0.1 | Other income | |||||||||||
Income tax effect of item above | - | - | - | Provision for income taxes | |||||||||||
Total gains on available for sale securities | - | 0.9 | 0.1 | ||||||||||||
Pension and other retirement benefits | |||||||||||||||
Amortization of actuarial losses and prior service costs included in net income | (5.8) | (8.5) | (4.7) | Operating expense | |||||||||||
Amortization of actuarial losses and prior service costs included in net income | (3.9) | (5.0) | (2.6) | SG&A expense | |||||||||||
Total before income taxes | (9.7) | (13.5) | (7.3) | ||||||||||||
Income tax effect of item above | 3.7 | 5.2 | 2.8 | Provision for income taxes | |||||||||||
Total pension and other retirement benefits | (6.0) | (8.3) | (4.5) | ||||||||||||
Total losses included in Net Income attributable to reclassifications out of AOCI | $ | 26.9 | $ | (7.3) | $ | (8.8) |
Year Ended December 31, 2016 | ||||||||||||||||||
Pension and Other Retirement Benefits | Gains / (Losses) on Cash Flow Hedges | Foreign Currency Translation Adjustments | Gains on Available for Sale Securities | Total | ||||||||||||||
Balance December 31, 2015 | $ | (85.7) | $ | (1.1) | $ | (256.0) | $ | 3.3 | $ | (339.5) | ||||||||
Other comprehensive income/(loss) before reclassifications | 0.2 | (0.9) | 2.4 | (0.2) | 1.5 | |||||||||||||
Amounts reclassified from AOCI | 6.0 | 3.7 | (36.6) | - | (26.9) | |||||||||||||
Other comprehensive income/(loss) | 6.2 | 2.8 | (34.2) | (0.2) | (25.4) | |||||||||||||
Balance December 31, 2016 | $ | (79.5) | $ | 1.7 | $ | (290.2) | $ | 3.1 | $ | (364.9) | ||||||||
Year Ended December 31, 2015 | ||||||||||||||||||
Balance December 31, 2014 | $ | (105.4) | $ | - | $ | (130.7) | $ | 0.9 | $ | (235.2) | ||||||||
Other comprehensive income/(loss) before reclassifications | 11.4 | (1.1) | (125.2) | 3.3 | (111.6) | |||||||||||||
Amounts reclassified from AOCI | 8.3 | - | (0.1) | (0.9) | 7.3 | |||||||||||||
Other comprehensive income/(loss) | 19.7 | (1.1) | (125.3) | 2.4 | (104.3) | |||||||||||||
Balance December 31, 2015 | $ | (85.7) | $ | (1.1) | $ | (256.0) | $ | 3.3 | $ | (339.5) | ||||||||
Year Ended December 31, 2014 | ||||||||||||||||||
Balance December 31, 2013 | $ | (53.2) | $ | - | $ | (1.4) | $ | - | $ | (54.6) | ||||||||
Other comprehensive income/(loss) before reclassifications | (56.7) | - | (133.7) | 1.0 | (189.4) | |||||||||||||
Amounts reclassified from AOCI | 4.5 | - | 4.4 | (0.1) | 8.8 | |||||||||||||
Other comprehensive income/(loss) | (52.2) | - | (129.3) | 0.9 | (180.6) | |||||||||||||
Balance December 31, 2014 | $ | (105.4) | $ | - | $ | (130.7) | $ | 0.9 | $ | (235.2) |
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NOTE 13 PENSION AND OTHER RETIREMENT BENEFITS
U.S. Plans
Moody’s maintains funded and unfunded noncontributory Defined Benefit Pension Plans. The U.S. plans provide defined benefits using a cash balance formula based on years of service and career average salary or final average pay for selected executives. The Company also provides certain healthcare and life insurance benefits for retired U.S. employees. The retirement healthcare plans are contributory; the life insurance plans are noncontributory. Moody’s funded and unfunded U.S. pension plans, the U.S. retirement healthcare plans and the U.S. retirement life insurance plans are collectively referred to herein as the “Retirement Plans”. The U.S. retirement healthcare plans and the U.S. retirement life insurance plans are collectively referred to herein as the “Other Retirement Plans”. Effective at the Distribution Date, Moody’s assumed responsibility for the pension and other retirement benefits relating to its active employees. New D&B has assumed responsibility for the Company’s retirees and vested terminated employees as of the Distribution Date.
Through 2007, substantially all U.S. employees were eligible to participate in the Company’s DBPPs. Effective January 1, 2008, the Company no longer offers DBPPs to U.S. employees hired or rehired on or after January 1, 2008 and new hires in the U.S. instead will receive a retirement contribution in similar benefit value under the Company’s Profit Participation Plan. Current participants of the Company’s Retirement Plans and Other Retirement Plans continue to accrue benefits based on existing plan benefit formulas.
Following is a summary of changes in benefit obligations and fair value of plan assets for the Retirement Plans for the years ended December 31:
Pension Plans | Other Retirement Plans | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Change in benefit obligation: | |||||||||||||||
Benefit obligation, beginning of the period | $ | (459.2) | $ | (461.8) | $ | (27.0) | $ | (26.7) | |||||||
Service cost | (20.1) | (21.6) | (2.2) | (2.2) | |||||||||||
Interest cost | (18.2) | (16.9) | (1.0) | (1.0) | |||||||||||
Plan participants’ contributions | - | - | (0.4) | (0.4) | |||||||||||
Plan amendments | - | 6.4 | - | 1.2 | |||||||||||
Benefits paid | 9.9 | 7.5 | 0.9 | 0.8 | |||||||||||
Actuarial gain (loss) | 4.2 | 1.9 | 0.7 | (0.1) | |||||||||||
Assumption changes | (6.1) | 25.3 | (0.5) | 1.4 | |||||||||||
Benefit obligation, end of the period | $ | (489.5) | $ | (459.2) | $ | (29.5) | $ | (27.0) | |||||||
Change in plan assets: | |||||||||||||||
Fair value of plan assets, beginning of the period | $ | 260.9 | $ | 248.4 | $ | - | $ | - | |||||||
Actual return on plan assets | 19.7 | (4.5) | - | - | |||||||||||
Benefits paid | (9.9) | (7.4) | (0.9) | (0.8) | |||||||||||
Employer contributions | 26.4 | 24.4 | 0.5 | 0.4 | |||||||||||
Plan participants' contributions | - | - | 0.4 | 0.4 | |||||||||||
Fair value of plan assets, end of the period | $ | 297.1 | $ | 260.9 | $ | - | $ | - | |||||||
Funded Status of the plans | $ | (192.4) | $ | (198.3) | $ | (29.5) | $ | (27.0) | |||||||
Amounts recorded on the consolidated balance sheets: | |||||||||||||||
Pension and retirement benefits liability - current | $ | (5.1) | $ | (4.4) | $ | (1.0) | $ | (1.0) | |||||||
Pension and retirement benefits liability - non current | (187.3) | (193.9) | (28.5) | (26.0) | |||||||||||
Net amount recognized | $ | (192.4) | $ | (198.3) | $ | (29.5) | $ | (27.0) | |||||||
Accumulated benefit obligation, end of the period | $ | (433.1) | $ | (405.3) |
The following information is for those pension plans with an accumulated benefit obligation in excess of plan assets:
December 31, | ||||||
2016 | 2015 | |||||
Aggregate projected benefit obligation | $ | 489.5 | $ | 459.2 | ||
Aggregate accumulated benefit obligation | $ | 433.1 | $ | 405.3 | ||
Aggregate fair value of plan assets | $ | 297.1 | $ | 260.9 |
The following table summarizes the pre-tax net actuarial losses and prior service cost recognized in AOCI for the Company’s Retirement Plans as of December 31:
Pension Plans | Other Retirement Plans | |||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||
Net actuarial losses | $ | (133.9) | $ | (144.6) | $ | (4.0) | $ | (4.4) | ||||
Net prior service costs | 4.5 | 4.5 | 0.9 | 1.2 | ||||||||
Total recognized in AOCI- pretax | $ | (129.4) | $ | (140.1) | $ | (3.1) | $ | (3.2) |
The following table summarizes the estimated pre-tax net actuarial losses and prior service cost for the Company’s Retirement Plans that will be amortized from AOCI and recognized as components of net periodic expense during the next fiscal year:
Pension Plans | Other Retirement Plans | |||||
Net actuarial losses | $ | 9.7 | $ | 0.1 | ||
Net prior service costs | - | (0.3) | ||||
Total to be recognized as components of net periodic expense | $ | 9.7 | $ | (0.2) |
Net periodic benefit expenses recognized for the Retirement Plans for years ended December 31:
Pension Plans | Other Retirement Plans | |||||||||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||
Components of net periodic expense | ||||||||||||||||||
Service cost | $ | 20.1 | $ | 21.6 | $ | 18.4 | $ | 2.2 | $ | 2.2 | $ | 1.7 | ||||||
Interest cost | 18.2 | 16.9 | 16.5 | 1.0 | 1.0 | 0.9 | ||||||||||||
Expected return on plan assets | (17.0) | (14.4) | (14.3) | - | - | - | ||||||||||||
Amortization of net actuarial loss from earlier periods | 9.8 | 12.5 | 6.6 | 0.2 | 0.3 | - | ||||||||||||
Amortization of net prior service costs from earlier periods | 0.1 | 0.7 | 0.7 | (0.3) | - | - | ||||||||||||
Net periodic expense | $ | 31.2 | $ | 37.3 | $ | 27.9 | $ | 3.1 | $ | 3.5 | $ | 2.6 |
The following table summarizes the pre-tax amounts recorded in OCI related to the Company’s Retirement Plans for the years ended December 31:
Pension Plans | Other Retirement Plans | ||||||||||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | 2014 | ||||||||||||||
Amortization of net actuarial losses | $ | 9.8 | $ | 12.5 | $ | 6.6 | $ | 0.2 | $ | 0.3 | $ | - | |||||||
Amortization of prior service costs | 0.1 | 0.7 | 0.7 | (0.3) | - | - | |||||||||||||
Prior service costs | - | 6.5 | - | - | 1.2 | - | |||||||||||||
Net actuarial gain (loss) arising during the period | 0.8 | 8.4 | (87.5) | 0.2 | 1.3 | (3.7) | |||||||||||||
Total recognized in OCI – pre-tax | $ | 10.7 | $ | 28.1 | $ | (80.2) | $ | 0.1 | $ | 2.8 | $ | (3.7) |
ADDITIONAL INFORMATION:
Assumptions – Retirement Plans
Weighted-average assumptions used to determine benefit obligations at December 31:
Pension Plans | Other Retirement Plans | |||||||
2016 | 2015 | 2016 | 2015 | |||||
Discount rate | 3.89% | 4.04% | 3.85% | 4.00% | ||||
Rate of compensation increase | 3.72% | 3.74% | - | - |
Weighted-average assumptions used to determine net periodic benefit expense for years ended December 31:
Pension Plans | Other Retirement Plans | |||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||
Discount rate | 4.04% | 3.78% | 4.71% | 4.00% | 3.65% | 4.45% | ||||||
Expected return on plan assets | 6.10% | 5.80% | 6.80% | - | - | - | ||||||
Rate of compensation increase | 3.74% | 3.76% | 4.00% | - | - | - |
The expected rate of return on plan assets represents the Company’s best estimate of the long-term return on plan assets and is determined by using a building block approach, which generally weighs the underlying long-term expected rate of return for each major asset class based on their respective allocation target within the plan portfolio, net of plan paid expenses. As the assumption reflects a long-term time horizon, the plan performance in any one particular year does not, by itself, significantly influence the Company’s evaluation. For 2016, the expected rate of return used in calculating the net periodic benefit costs was 6.10%. For 2017, the Company’s expected rate of return assumption was 5.40% to reflect the Company’s current view of long-term capital market outlook. In addition, the Company has updated its mortality assumption by adopting the newly released mortality improvement scale MP-2016 to accompany the RP-2014 mortality tables to reflect the latest information regarding future mortality expectations by the Society of Actuaries. Additionally, the assumed healthcare cost trend rate assumption is not material to the valuation of the other retirement plans.
Plan Assets
Moody’s investment objective for the assets in the funded pension plan is to earn total returns that will minimize future contribution requirements over the long-term within a prudent level of risk. The Company works with its independent investment consultants to determine asset allocation targets for its pension plan investment portfolio based on its assessment of business and financial conditions, demographic and actuarial data, funding characteristics, and related risk factors. Other relevant factors, including historical and forward looking views of inflation and capital market returns, are also considered. Risk management practices include monitoring plan asset performance, diversification across asset classes and investment styles, and periodic rebalancing toward asset allocation targets. The Company’s Asset Management Committee is responsible for overseeing the investment activities of the plan, which includes selecting acceptable asset classes, defining allowable ranges of holdings by asset class and by individual investment managers, defining acceptable securities within each asset class, and establishing investment performance expectations. Ongoing monitoring of the plan includes reviews of investment performance and managers on a regular basis, annual liability measurements, and periodic asset/liability studies.
In 2014, the Company implemented a revised investment policy, which uses risk-controlled investment strategies by increasing the plan’s asset allocation to fixed income securities and specifying ranges of acceptable target allocation by asset class based on different levels of the plan’s accounting funded status. In addition, the investment policy also requires the investment-grade fixed income asset be rebalanced between shorter and longer duration bonds as the interest rate environment changes. This revised investment policy is designed to help protect the plan’s funded status and to limit volatility of the Company’s contributions. Based on the revised policy, the Company’s current target asset allocation is approximately 53% (range of 48% to 58%) in equity securities, 40% (range of 35% to 45%) in fixed income securities and 7% (range of 4% to 10%) in other investments and the plan will use a combination of active and passive investment strategies and different investment styles for its investment portfolios within each asset class. The plan’s equity investments are diversified across U.S. and non-U.S. stocks of small, medium and large capitalization. The plan’s fixed income investments are diversified principally across U.S. and non-U.S. government and corporate bonds which are expected to help reduce plan exposure to interest rate variation and to better align assets with obligations. The plan also invests in other fixed income investments such debts rated below investment grade, emerging market debt, and convertible securities. The plan’s other investment, which is made through a private real estate debt fund, is expected to provide additional diversification benefits and absolute return enhancement to the plan assets.
Fair value of the assets in the Company’s funded pension plan by asset category at December 31, 2016 and 2015 are as follows:
Fair Value Measurement as of December 31, 2016 | ||||||||||||||||
Asset Category | Balance | Level 1 | Level 2 | Measured using NAV practical expedient (a) | % of total assets | |||||||||||
Cash and cash equivalent | $ | 1.2 | $ | - | $ | 1.2 | $ | - | - | |||||||
Common/collective trust funds - equity securities | ||||||||||||||||
U.S. large-cap | 130.1 | - | 130.1 | - | 44% | |||||||||||
U.S. small and mid-cap | 19.7 | - | 19.7 | - | 7% | |||||||||||
Emerging markets | 20.8 | - | 20.8 | - | 7% | |||||||||||
Total equity investments | 170.6 | - | 170.6 | - | 57% | |||||||||||
Emerging markets bond fund | 11.4 | 11.4 | - | - | 4% | |||||||||||
Common/collective trust funds - fixed income securities | ||||||||||||||||
Intermediate-term investment grade U.S. government/ corporate bonds | 74.3 | - | 74.3 | - | 25% | |||||||||||
U.S. Treasury Inflation-Protected Securities (TIPs) | 13.1 | - | 13.1 | - | 4% | |||||||||||
Private investment fund - convertible securities | 9.1 | - | - | 9.1 | 3% | |||||||||||
Private investment fund - high yield securities | 9.0 | - | - | 9.0 | 3% | |||||||||||
Total fixed-income investments | 116.9 | 11.4 | 87.4 | 18.1 | 39% | |||||||||||
Other investment - private real estate debt fund | 8.4 | - | - | 8.4 | 3% | |||||||||||
Total Assets | $ | 297.1 | $ | 11.4 | $ | 259.2 | $ | 26.5 | 100% | |||||||
Fair Value Measurement as of December 31, 2015 | ||||||||||||||||
Asset Category | Balance | Level 1 | Level 2 | Measured using NAV practical expedient (a) | % of total assets | |||||||||||
Cash and cash equivalent | $ | 0.5 | $ | - | $ | 0.5 | $ | - | - | |||||||
Common/collective trust funds - equity securities | ||||||||||||||||
Global large-cap | 99.9 | - | 99.9 | - | 38% | |||||||||||
U.S. small and mid-cap | 16.0 | - | 16.0 | - | 6% | |||||||||||
Emerging markets | 16.5 | - | 16.5 | - | 6% | |||||||||||
Total equity investments | 132.4 | - | 132.4 | - | 51% | |||||||||||
Emerging markets bond fund | 10.6 | 10.6 | - | - | 4% | |||||||||||
Common/collective trust funds - fixed income securities | ||||||||||||||||
Intermediate-term investment grade U.S. government/ corporate bonds | 69.8 | - | 69.8 | - | 27% | |||||||||||
U.S. Treasury Inflation-Protected Securities (TIPs) | 12.5 | - | 12.5 | - | 5% | |||||||||||
Private investment fund - convertible securities | 7.3 | - | - | 7.3 | 3% | |||||||||||
Private investment fund - high yield securities | 7.4 | - | - | 7.4 | 3% | |||||||||||
Total fixed-income investments | 107.6 | 10.6 | 82.3 | 14.7 | 41% | |||||||||||
Other investment - private real estate fund | 20.4 | - | - | 20.4 | 8% | |||||||||||
Total Assets | $ | 260.9 | $ | 10.6 | $ | 215.2 | $ | 35.1 | 100% | |||||||
(a) Investments are measured using the net asset value per share (or its equivalent) practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in the table are intended to permit a reconciliation of the fair value hierarchy to the value of the total plan assets. |
Cash and cash equivalents are primarily comprised of investment in money market mutual funds. In determining fair value, Level 1 investments are valued based on quoted market prices in active markets. Investments in common/collective trust funds are valued using the net asset value (NAV) per unit in each fund. The NAV is based on the value of the underlying investments owned by each trust, minus its liabilities, and then divided by the number of shares outstanding. Common/collective trust funds are categorized in Level 2 to the extent that they are considered to have a readily determinable fair value. Investments for which fair value is estimated by using the NAV per share (or its equivalent) as a practical expedient are not categorized in the fair value hierarchy.
Except for the Company’s U.S. funded pension plan, all of Moody’s Retirement Plans are unfunded and therefore have no plan assets.
Cash Flows The Company contributed $22.4 million and $21.6 million to its U.S. funded pension plan during the years ended December 31, 2016 and 2015, respectively. The Company made payments of $4.0 million and $2.7 million related to its U.S. unfunded pension plan obligations during the years ended December 31, 2016 and 2015, respectively. The Company made payments of $0.5 million and $0.4 million to its Other Retirement Plans during the years ended December 31, 2016 and 2015, respectively. The Company presently anticipates making contributions of $10.4 million to its funded pension plan, and anticipates making payments of $5.1 million related to its unfunded U.S. pension plans and $1.0 million related to its Other Retirement Plans during the year ended December 31, 2017.
Estimated Future Benefits Payable
Estimated future benefits payments for the Retirement Plans are as follows as of year ended December 31, 2016:
Year Ending December 31, | Pension Plans | Other Retirement Plans | ||||
2017 | $ | 12.2 | $ | 1.0 | ||
2018 | 42.8 | 1.1 | ||||
2019 | 15.3 | 1.3 | ||||
2020 | 17.1 | 1.5 | ||||
2021 | 25.9 | 1.6 | ||||
2022 – 2026 | $ | 134.5 | $ | 11.3 |
Defined Contribution Plans
Moody’s has a Profit Participation Plan covering substantially all U.S. employees. The Profit Participation Plan provides for an employee salary deferral and the Company matches employee contributions, equal to 50% of employee contribution up to a maximum of 3% of the employee’s pay. Moody’s also makes additional contributions to the Profit Participation Plan based on year-to-year growth in the Company’s EPS. Effective January 1, 2008, all new hires are automatically enrolled in the Profit Participation Plan when they meet eligibility requirements unless they decline participation. As the Company’s U.S. DBPPs are closed to new entrants effective January 1, 2008, all eligible new hires will instead receive a retirement contribution into the Profit Participation Plan in value similar to the pension benefits. Additionally, effective January 1, 2008, the Company implemented a deferred compensation plan in the U.S., which is unfunded and provides for employee deferral of compensation and Company matching contributions related to compensation in excess of the IRS limitations on benefits and contributions under qualified retirement plans. Total expenses associated with U.S. defined contribution plans were $28.3 million, $21.1 million and $26.8 million in 2016, 2015, and 2014, respectively.
Effective January 1, 2008, Moody’s has designated the Moody’s Stock Fund, an investment option under the Profit Participation Plan, as an Employee Stock Ownership Plan and, as a result, participants in the Moody’s Stock Fund may receive dividends in cash or may reinvest such dividends into the Moody’s Stock Fund. Moody’s paid approximately $0.7 million, $0.7 million and $0.6 million in dividends during the years ended December 31, 2016, 2015 and 2014, respectively, for the Company’s common shares held by the Moody’s Stock Fund. The Company records the dividends as a reduction of retained earnings in the Consolidated Statements of Shareholders’ Equity (Deficit). The Moody’s Stock Fund held approximately 471,000 and 488,000 shares of Moody’s common stock at December 31, 2016 and 2015, respectively.
International Plans
Certain of the Company’s international operations provide pension benefits to their employees. The non-U.S. defined benefit pension plans are immaterial. For defined contribution plans, company contributions are primarily determined as a percentage of employees’ eligible compensation. Moody’s also makes contributions to non-U.S. employees under a profit sharing plan which is based on year-to-year growth in the Company’s diluted EPS. Expenses related to these defined contribution plans for the years ended December 31, 2016, 2015 and 2014 were $24.5 million, $26.7 million and $30.6 million, respectively.
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Pension Plans | Other Retirement Plans | ||||||||||||||
2016 | 2015 | 2016 | 2015 | ||||||||||||
Change in benefit obligation: | |||||||||||||||
Benefit obligation, beginning of the period | $ | (459.2) | $ | (461.8) | $ | (27.0) | $ | (26.7) | |||||||
Service cost | (20.1) | (21.6) | (2.2) | (2.2) | |||||||||||
Interest cost | (18.2) | (16.9) | (1.0) | (1.0) | |||||||||||
Plan participants’ contributions | - | - | (0.4) | (0.4) | |||||||||||
Plan amendments | - | 6.4 | - | 1.2 | |||||||||||
Benefits paid | 9.9 | 7.5 | 0.9 | 0.8 | |||||||||||
Actuarial gain (loss) | 4.2 | 1.9 | 0.7 | (0.1) | |||||||||||
Assumption changes | (6.1) | 25.3 | (0.5) | 1.4 | |||||||||||
Benefit obligation, end of the period | $ | (489.5) | $ | (459.2) | $ | (29.5) | $ | (27.0) | |||||||
Change in plan assets: | |||||||||||||||
Fair value of plan assets, beginning of the period | $ | 260.9 | $ | 248.4 | $ | - | $ | - | |||||||
Actual return on plan assets | 19.7 | (4.5) | - | - | |||||||||||
Benefits paid | (9.9) | (7.4) | (0.9) | (0.8) | |||||||||||
Employer contributions | 26.4 | 24.4 | 0.5 | 0.4 | |||||||||||
Plan participants' contributions | - | - | 0.4 | 0.4 | |||||||||||
Fair value of plan assets, end of the period | $ | 297.1 | $ | 260.9 | $ | - | $ | - | |||||||
Funded Status of the plans | $ | (192.4) | $ | (198.3) | $ | (29.5) | $ | (27.0) | |||||||
Amounts recorded on the consolidated balance sheets: | |||||||||||||||
Pension and retirement benefits liability - current | $ | (5.1) | $ | (4.4) | $ | (1.0) | $ | (1.0) | |||||||
Pension and retirement benefits liability - non current | (187.3) | (193.9) | (28.5) | (26.0) | |||||||||||
Net amount recognized | $ | (192.4) | $ | (198.3) | $ | (29.5) | $ | (27.0) | |||||||
Accumulated benefit obligation, end of the period | $ | (433.1) | $ | (405.3) |
December 31, | ||||||
2016 | 2015 | |||||
Aggregate projected benefit obligation | $ | 489.5 | $ | 459.2 | ||
Aggregate accumulated benefit obligation | $ | 433.1 | $ | 405.3 | ||
Aggregate fair value of plan assets | $ | 297.1 | $ | 260.9 |
Pension Plans | Other Retirement Plans | |||||||||||
2016 | 2015 | 2016 | 2015 | |||||||||
Net actuarial losses | $ | (133.9) | $ | (144.6) | $ | (4.0) | $ | (4.4) | ||||
Net prior service costs | 4.5 | 4.5 | 0.9 | 1.2 | ||||||||
Total recognized in AOCI- pretax | $ | (129.4) | $ | (140.1) | $ | (3.1) | $ | (3.2) |
Pension Plans | Other Retirement Plans | |||||
Net actuarial losses | $ | 9.7 | $ | 0.1 | ||
Net prior service costs | - | (0.3) | ||||
Total to be recognized as components of net periodic expense | $ | 9.7 | $ | (0.2) |
Pension Plans | Other Retirement Plans | |||||||||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||||||||
Components of net periodic expense | ||||||||||||||||||
Service cost | $ | 20.1 | $ | 21.6 | $ | 18.4 | $ | 2.2 | $ | 2.2 | $ | 1.7 | ||||||
Interest cost | 18.2 | 16.9 | 16.5 | 1.0 | 1.0 | 0.9 | ||||||||||||
Expected return on plan assets | (17.0) | (14.4) | (14.3) | - | - | - | ||||||||||||
Amortization of net actuarial loss from earlier periods | 9.8 | 12.5 | 6.6 | 0.2 | 0.3 | - | ||||||||||||
Amortization of net prior service costs from earlier periods | 0.1 | 0.7 | 0.7 | (0.3) | - | - | ||||||||||||
Net periodic expense | $ | 31.2 | $ | 37.3 | $ | 27.9 | $ | 3.1 | $ | 3.5 | $ | 2.6 |
Pension Plans | Other Retirement Plans | ||||||||||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | 2014 | ||||||||||||||
Amortization of net actuarial losses | $ | 9.8 | $ | 12.5 | $ | 6.6 | $ | 0.2 | $ | 0.3 | $ | - | |||||||
Amortization of prior service costs | 0.1 | 0.7 | 0.7 | (0.3) | - | - | |||||||||||||
Prior service costs | - | 6.5 | - | - | 1.2 | - | |||||||||||||
Net actuarial gain (loss) arising during the period | 0.8 | 8.4 | (87.5) | 0.2 | 1.3 | (3.7) | |||||||||||||
Total recognized in OCI – pre-tax | $ | 10.7 | $ | 28.1 | $ | (80.2) | $ | 0.1 | $ | 2.8 | $ | (3.7) |
Fair Value Measurement as of December 31, 2016 | ||||||||||||||||
Asset Category | Balance | Level 1 | Level 2 | Measured using NAV practical expedient (a) | % of total assets | |||||||||||
Cash and cash equivalent | $ | 1.2 | $ | - | $ | 1.2 | $ | - | - | |||||||
Common/collective trust funds - equity securities | ||||||||||||||||
U.S. large-cap | 130.1 | - | 130.1 | - | 44% | |||||||||||
U.S. small and mid-cap | 19.7 | - | 19.7 | - | 7% | |||||||||||
Emerging markets | 20.8 | - | 20.8 | - | 7% | |||||||||||
Total equity investments | 170.6 | - | 170.6 | - | 57% | |||||||||||
Emerging markets bond fund | 11.4 | 11.4 | - | - | 4% | |||||||||||
Common/collective trust funds - fixed income securities | ||||||||||||||||
Intermediate-term investment grade U.S. government/ corporate bonds | 74.3 | - | 74.3 | - | 25% | |||||||||||
U.S. Treasury Inflation-Protected Securities (TIPs) | 13.1 | - | 13.1 | - | 4% | |||||||||||
Private investment fund - convertible securities | 9.1 | - | - | 9.1 | 3% | |||||||||||
Private investment fund - high yield securities | 9.0 | - | - | 9.0 | 3% | |||||||||||
Total fixed-income investments | 116.9 | 11.4 | 87.4 | 18.1 | 39% | |||||||||||
Other investment - private real estate debt fund | 8.4 | - | - | 8.4 | 3% | |||||||||||
Total Assets | $ | 297.1 | $ | 11.4 | $ | 259.2 | $ | 26.5 | 100% | |||||||
Fair Value Measurement as of December 31, 2015 | ||||||||||||||||
Asset Category | Balance | Level 1 | Level 2 | Measured using NAV practical expedient (a) | % of total assets | |||||||||||
Cash and cash equivalent | $ | 0.5 | $ | - | $ | 0.5 | $ | - | - | |||||||
Common/collective trust funds - equity securities | ||||||||||||||||
Global large-cap | 99.9 | - | 99.9 | - | 38% | |||||||||||
U.S. small and mid-cap | 16.0 | - | 16.0 | - | 6% | |||||||||||
Emerging markets | 16.5 | - | 16.5 | - | 6% | |||||||||||
Total equity investments | 132.4 | - | 132.4 | - | 51% | |||||||||||
Emerging markets bond fund | 10.6 | 10.6 | - | - | 4% | |||||||||||
Common/collective trust funds - fixed income securities | ||||||||||||||||
Intermediate-term investment grade U.S. government/ corporate bonds | 69.8 | - | 69.8 | - | 27% | |||||||||||
U.S. Treasury Inflation-Protected Securities (TIPs) | 12.5 | - | 12.5 | - | 5% | |||||||||||
Private investment fund - convertible securities | 7.3 | - | - | 7.3 | 3% | |||||||||||
Private investment fund - high yield securities | 7.4 | - | - | 7.4 | 3% | |||||||||||
Total fixed-income investments | 107.6 | 10.6 | 82.3 | 14.7 | 41% | |||||||||||
Other investment - private real estate fund | 20.4 | - | - | 20.4 | 8% | |||||||||||
Total Assets | $ | 260.9 | $ | 10.6 | $ | 215.2 | $ | 35.1 | 100% | |||||||
(a) Investments are measured using the net asset value per share (or its equivalent) practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in the table are intended to permit a reconciliation of the fair value hierarchy to the value of the total plan assets. |
Year Ending December 31, | Pension Plans | Other Retirement Plans | ||||
2017 | $ | 12.2 | $ | 1.0 | ||
2018 | 42.8 | 1.1 | ||||
2019 | 15.3 | 1.3 | ||||
2020 | 17.1 | 1.5 | ||||
2021 | 25.9 | 1.6 | ||||
2022 – 2026 | $ | 134.5 | $ | 11.3 |
Pension Plans | Other Retirement Plans | |||||||
2016 | 2015 | 2016 | 2015 | |||||
Discount rate | 3.89% | 4.04% | 3.85% | 4.00% | ||||
Rate of compensation increase | 3.72% | 3.74% | - | - |
Pension Plans | Other Retirement Plans | |||||||||||
2016 | 2015 | 2014 | 2016 | 2015 | 2014 | |||||||
Discount rate | 4.04% | 3.78% | 4.71% | 4.00% | 3.65% | 4.45% | ||||||
Expected return on plan assets | 6.10% | 5.80% | 6.80% | - | - | - | ||||||
Rate of compensation increase | 3.74% | 3.76% | 4.00% | - | - | - |
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NOTE 14 STOCK-BASED COMPENSATION PLANS
Under the 1998 Plan, 33.0 million shares of the Company’s common stock have been reserved for issuance. The 2001 Plan, which is shareholder approved, permits the granting of up to 50.6 million shares, of which not more than 14.0 million shares are available for grants of awards other than stock options. The Stock Plans also provide for the granting of restricted stock. The Stock Plans provide that options are exercisable not later than ten years from the grant date. The vesting period for awards under the Stock Plans is generally determined by the Board at the date of the grant and has been four years except for employees who are at or near retirement eligibility, as defined, for which vesting is between one and four years. Additionally, the vesting period is three years for certain performance-based restricted stock that contain a condition whereby the number of shares that ultimately vest are based on the achievement of certain non-market based performance metrics of the Company. Options may not be granted at less than the fair market value of the Company’s common stock at the date of grant.
The Company maintains the Directors’ Plan for its Board, which permits the granting of awards in the form of non-qualified stock options, restricted stock or performance shares. The Directors’ Plan provides that options are exercisable not later than ten years from the grant date. The vesting period is determined by the Board at the date of the grant and is generally one year for both options and restricted stock. Under the Directors’ Plan, 1.7 million shares of common stock were reserved for issuance. Any director of the Company who is not an employee of the Company or any of its subsidiaries as of the date that an award is granted is eligible to participate in the Directors’ Plan.
Presented below is a summary of the stock-based compensation expense and associated tax benefit in the accompanying Consolidated Statements of Operations:
Year Ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
Stock-based compensation expense | $ | 98.1 | $ | 87.2 | $ | 80.4 | ||
Tax benefit | $ | 31.9 | $ | 28.6 | $ | 27.5 |
The fair value of each employee stock option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions noted below. The expected dividend yield is derived from the annual dividend rate on the date of grant. The expected stock volatility is based on an assessment of historical weekly stock prices of the Company as well as implied volatility from Moody’s traded options. The risk-free interest rate is based on U.S. government zero coupon bonds with maturities similar to the expected holding period. The expected holding period was determined by examining historical and projected post-vesting exercise behavior activity.
The following weighted average assumptions were used for options granted:
Year Ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
Expected dividend yield | 1.83% | 1.39% | 1.41% | |||||
Expected stock volatility | 32% | 39% | 41% | |||||
Risk-free interest rate | 1.60% | 1.88% | 2.30% | |||||
Expected holding period | 6.8 years | 6.9 years | 7.2 years | |||||
Grant date fair value | $ | 22.98 | $ | 36.08 | $ | 31.53 |
A summary of option activity as of December 31, 2016 and changes during the year then ended is presented below:
Options | Shares | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||
Outstanding, December 31, 2015 | 4.8 | $ | 46.47 | |||||||
Granted | 0.5 | $ | 81.02 | |||||||
Exercised | (1.4) | $ | 50.10 | |||||||
Outstanding, December 31, 2016 | 3.9 | $ | 49.68 | 4.5 years | $ | 172.2 | ||||
Vested and expected to vest, December 31, 2016 | 3.7 | $ | 48.81 | 4.4 years | $ | 171.0 | ||||
Exercisable, December 31, 2016 | 2.8 | $ | 38.68 | 3.2 years | $ | 157.6 |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (the difference between Moody’s closing stock price on the last trading day of the year ended December 31, 2016 and the exercise prices, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options as of December 31, 2016. This amount varies based on the fair value of Moody’s stock. As of December 31, 2016 there was $7.5 million of total unrecognized compensation expense related to options. The expense is expected to be recognized over a weighted average period of 1.5 years.
The following table summarizes information relating to stock option exercises:
Year Ended December 31, | ||||||||||
2016 | 2015 | 2014 | ||||||||
Proceeds from stock option exercises | $ | 71.8 | $ | 83.9 | $ | 145.5 | ||||
Aggregate intrinsic value | $ | 71.3 | $ | 72.9 | $ | 122.3 | ||||
Tax benefit realized upon exercise | $ | 24.3 | $ | 26.0 | $ | 43.2 |
A summary of the status of the Company’s nonvested restricted stock as of December 31, 2016 and changes during the year then ended is presented below:
Nonvested Restricted Stock | Shares | Weighted Average Grant Date Fair Value Per Share | ||||
Balance, December 31, 2015 | 2.3 | $ | 75.33 | |||
Granted | 1.2 | $ | 80.92 | |||
Vested | (1.0) | $ | 91.70 | |||
Forfeited | (0.1) | $ | 81.01 | |||
Balance, December 31, 2016 | 2.4 | $ | 81.17 |
As of December 31, 2016, there was $109.7 million of total unrecognized compensation expense related to nonvested restricted stock. The expense is expected to be recognized over a weighted average period of 1.6 years.
The following table summarizes information relating to the vesting of restricted stock awards:
Year Ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
Fair value of shares vested | $ | 92.9 | $ | 111.9 | $ | 92.4 | ||
Tax benefit realized upon vesting | $ | 29.4 | $ | 38.1 | $ | 31.2 |
A summary of the status of the Company’s performance-based restricted stock as of December 31, 2016 and changes during the year then ended is presented below:
Performance-based restricted stock | Shares | Weighted Average Grant Date Fair Value Per Share | ||||
Balance, December 31, 2015 | 0.6 | $ | 64.46 | |||
Granted | 0.2 | $ | 76.66 | |||
Vested | (0.3) | $ | 44.07 | |||
Balance, December 31, 2016 | 0.5 | $ | 80.70 |
The following table summarizes information relating to the vesting of the Company’s performance-based restricted stock awards:
Year Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
Fair value of shares vested | $ | 23.6 | $ | 43.1 | $ | 38.0 | |||
Tax benefit realized upon vesting | $ | 8.4 | $ | 15.6 | $ | 14.4 |
As of December 31, 2016, there was $13.7 millions of total unrecognized compensation expense related to this plan. The expense is expected to be recognized over a weighted average period of 0.9 years.
The Company has a policy of issuing treasury stock to satisfy shares issued under stock-based compensation plans.
In addition, the Company also sponsors the ESPP. Under the ESPP, 6.0 million shares of common stock were reserved for issuance. The ESPP allows eligible employees to purchase common stock of the Company on a monthly basis at a discount to the average of the high and the low trading prices on the New York Stock Exchange on the last trading day of each month. This discount was 5% in 2016, 2015 and 2014 resulting in the ESPP qualifying for non-compensatory status under Topic 718 of the ASC. Accordingly, no compensation expense was recognized for the ESPP in 2016, 2015, and 2014. The employee purchases are funded through after-tax payroll deductions, which plan participants can elect from one percent to ten percent of compensation, subject to the annual federal limit
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Year Ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
Stock-based compensation expense | $ | 98.1 | $ | 87.2 | $ | 80.4 | ||
Tax benefit | $ | 31.9 | $ | 28.6 | $ | 27.5 |
Year Ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
Expected dividend yield | 1.83% | 1.39% | 1.41% | |||||
Expected stock volatility | 32% | 39% | 41% | |||||
Risk-free interest rate | 1.60% | 1.88% | 2.30% | |||||
Expected holding period | 6.8 years | 6.9 years | 7.2 years | |||||
Grant date fair value | $ | 22.98 | $ | 36.08 | $ | 31.53 |
Options | Shares | Weighted Average Exercise Price Per Share | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||
Outstanding, December 31, 2015 | 4.8 | $ | 46.47 | |||||||
Granted | 0.5 | $ | 81.02 | |||||||
Exercised | (1.4) | $ | 50.10 | |||||||
Outstanding, December 31, 2016 | 3.9 | $ | 49.68 | 4.5 years | $ | 172.2 | ||||
Vested and expected to vest, December 31, 2016 | 3.7 | $ | 48.81 | 4.4 years | $ | 171.0 | ||||
Exercisable, December 31, 2016 | 2.8 | $ | 38.68 | 3.2 years | $ | 157.6 |
Year Ended December 31, | ||||||||||
2016 | 2015 | 2014 | ||||||||
Proceeds from stock option exercises | $ | 71.8 | $ | 83.9 | $ | 145.5 | ||||
Aggregate intrinsic value | $ | 71.3 | $ | 72.9 | $ | 122.3 | ||||
Tax benefit realized upon exercise | $ | 24.3 | $ | 26.0 | $ | 43.2 |
Year Ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
Fair value of shares vested | $ | 92.9 | $ | 111.9 | $ | 92.4 | ||
Tax benefit realized upon vesting | $ | 29.4 | $ | 38.1 | $ | 31.2 |
Performance-based restricted stock | Shares | Weighted Average Grant Date Fair Value Per Share | ||||
Balance, December 31, 2015 | 0.6 | $ | 64.46 | |||
Granted | 0.2 | $ | 76.66 | |||
Vested | (0.3) | $ | 44.07 | |||
Balance, December 31, 2016 | 0.5 | $ | 80.70 |
Year Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
Fair value of shares vested | $ | 23.6 | $ | 43.1 | $ | 38.0 | |||
Tax benefit realized upon vesting | $ | 8.4 | $ | 15.6 | $ | 14.4 |
Nonvested Restricted Stock | Shares | Weighted Average Grant Date Fair Value Per Share | ||||
Balance, December 31, 2015 | 2.3 | $ | 75.33 | |||
Granted | 1.2 | $ | 80.92 | |||
Vested | (1.0) | $ | 91.70 | |||
Forfeited | (0.1) | $ | 81.01 | |||
Balance, December 31, 2016 | 2.4 | $ | 81.17 |
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NOTE 15 INCOME TAXES
Components of the Company’s provision for income taxes are as follows:
Year Ended December 31, | ||||||||||
2016 | 2015 | 2014 | ||||||||
Current: | ||||||||||
Federal | $ | 292.9 | $ | 278.2 | $ | 252.8 | ||||
State and Local | 39.5 | 40.1 | 70.2 | |||||||
Non-U.S. | 102.9 | 93.6 | 102.1 | |||||||
Total current | 435.3 | 411.9 | 425.1 | |||||||
Deferred: | ||||||||||
Federal | (125.8) | 14.7 | 0.9 | |||||||
State and Local | (20.3) | 7.6 | 4.9 | |||||||
Non-U.S. | (7.0) | (4.2) | 24.1 | |||||||
Total deferred | (153.1) | 18.1 | 29.9 | |||||||
Total provision for income taxes | $ | 282.2 | $ | 430.0 | $ | 455.0 |
A reconciliation of the U.S. federal statutory tax rate to the Company’s effective tax rate on income before provision for income taxes is as follows:
Year Ended December 31, | |||||||
2016 | 2015 | 2014 | |||||
U.S. statutory tax rate | 35.0% | 35.0% | 35.0% | ||||
State and local taxes, net of federal tax benefit | 2.2 | 3.0 | 3.6 | ||||
Benefit of foreign operations | (13.3) | (5.8) | (7.4) | ||||
Settlement charge | 27.4 | - | - | ||||
Legacy tax items | (0.1) | (0.2) | (0.2) | ||||
Other | (0.6) | (0.8) | 0.1 | ||||
Effective tax rate | 50.6% | 31.2% | 31.1% | ||||
Income tax paid | $ | 355.7 | 397.4 | $ | 369.4 |
The source of income before provision for income taxes is as follows:
Year Ended December 31, | ||||||
2016 | 2015 | 2014 | ||||
United States | $ | 37.2 | $ | 913.9 | $ | 912.6 |
International | 520.8 | 465.7 | 548.4 | |||
Income before provision for income taxes | $ | 558.0 | $ | 1,379.6 | $ | 1,461.0 |
The components of deferred tax assets and liabilities are as follows:
December 31, | |||||||||
2016 | 2015 | ||||||||
Deferred tax assets: | |||||||||
Current: | |||||||||
Account receivable allowances | $ | - | $ | 6.6 | |||||
Accrued compensation and benefits | - | 12.5 | |||||||
Deferred revenue | - | 8.0 | |||||||
Legal and professional fees | - | 10.7 | |||||||
Restructuring | - | 1.2 | |||||||
Other | - | 3.0 | |||||||
Total current | - | 42.0 | |||||||
Non-current: | |||||||||
Account receivable allowances | 6.0 | - | |||||||
Accumulated depreciation and amortization | 1.3 | 0.9 | |||||||
Stock-based compensation | 54.4 | 56.1 | |||||||
Accrued compensation and benefits | 119.3 | 101.6 | |||||||
Deferred rent and construction allowance | 30.1 | 28.5 | |||||||
Deferred revenue | 46.2 | 35.8 | |||||||
Foreign net operating loss (1) | 3.7 | 3.7 | |||||||
Settlement Charge | 163.2 | - | |||||||
Legal and professional fees | 4.2 | - | |||||||
Restructuring | 2.2 | - | |||||||
Uncertain tax positions | 37.3 | 38.2 | |||||||
Self-insured related reserves | 15.1 | 22.7 | |||||||
Other | 4.5 | 4.4 | |||||||
Total non-current | 487.5 | 291.9 | |||||||
Total deferred tax assets | $ | 487.5 | $ | 333.9 | |||||
Deferred tax liabilities: | |||||||||
Current: | |||||||||
Compensation and benefits | $ | - | $ | (3.0) | |||||
Unrealized gain on net investment hedges - OCI | - | (24.2) | |||||||
Other | - | (1.5) | |||||||
Total Current | - | (28.7) | |||||||
Non-current: | |||||||||
Accumulated depreciation and amortization of intangible assets and capitalized software | $ | (189.8) | $ | (178.3) | |||||
Foreign earnings to be repatriated | (7.5) | (2.9) | |||||||
Capital Gains | (24.1) | (24.7) | |||||||
Self-insured related income | (15.1) | (22.7) | |||||||
Stock based compensation | (2.9) | - | |||||||
Unrealized gain on net investment hedges - OCI | (21.0) | - | |||||||
Other liabilities | (12.1) | (5.8) | |||||||
Total non-current | (272.5) | (234.4) | |||||||
Total deferred tax liabilities | (272.5) | (263.1) | |||||||
Net deferred tax asset | 215.0 | 70.8 | |||||||
Valuation allowance | (3.2) | (4.3) | |||||||
Total net deferred tax assets | $ | 211.8 | $ | 66.5 | |||||
(1) Amounts are primarily set to expire beginning in 2018, if unused. |
On November 20, 2015, the FASB issued Accounting Standards Update 2015-17, “Balance Sheet Classification of Deferred Taxes”, which required that all deferred tax assets and liabilities be classified as non-current on the balance sheet. The guidance is effective for fiscal years beginning after December 15th, 2016. Early adoption is permitted. The Company has adopted this guidance as of January 1st, 2016 on a prospective basis. Prior periods were not retrospectively adjusted.
As of December 31, 2016, the Company had $2,902.5 million of undistributed earnings of foreign subsidiaries that it intends to indefinitely reinvest in foreign operations. The Company has not provided deferred income taxes on these indefinitely reinvested earnings. It is not practicable to determine the amount of deferred taxes that might be required to be provided if such earnings were distributed in the future, due to complexities in the tax laws and in the hypothetical calculations that would have to be made.
The Company had valuation allowances of $3.2 million and $4.3 million at December 31, 2016 and 2015, respectively, related to foreign net operating losses for which realization is uncertain.
As of December 31, 2016 the Company had $199.8 million of UTBs of which $157.4 million represents the amount that, if recognized, would impact the effective tax rate in future periods.
A reconciliation of the beginning and ending amount of UTBs is as follows:
Year Ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
Balance as of January 1 | $ | 203.4 | $ | 220.3 | $ | 195.6 | ||
Additions for tax positions related to the current year | 21.9 | 24.1 | 52.5 | |||||
Additions for tax positions of prior years | 12.4 | 14.0 | 8.7 | |||||
Reductions for tax positions of prior years | (27.6) | (41.6) | (31.4) | |||||
Settlements with taxing authorities | (8.3) | (7.8) | (1.8) | |||||
Lapse of statute of limitations | (2.0) | (5.6) | (3.3) | |||||
Balance as of December 31 | $ | 199.8 | $ | 203.4 | $ | 220.3 |
The Company classifies interest related to UTBs in interest expense in its consolidated statements of operations. Penalties, if incurred, would be recognized in other non-operating expenses. During the years ended December 31, 2016 and 2015, the Company incurred a net interest expense of $6.2 million and $7.2 million respectively, related to UTBs. As of December 31, 2016 and 2015, the amount of accrued interest recorded in the Company’s consolidated balance sheet related to UTB’s was $34.1 million and $27.9 million, respectively.
Moody’s Corporation and subsidiaries are subject to U.S. federal income tax as well as income tax in various state, local and foreign jurisdictions. The Company settled U.S. tax audit years 2008 through 2010 in the fourth quarter of 2015. The Company’s U.S. federal income tax returns for the years 2011 and 2012 are under examination and its 2013, 2014 and 2015 returns remain open to examination. The Company’s New York State income tax returns for 2011 to 2014 are under examination. The Company’s New York City tax returns for 2014 and 2015 remain open to examination. The Company’s U.K. tax return for 2012 is under examination. Tax filings in the U.K. remain open to examination for 2013 through 2015.
For current ongoing audits related to open tax years, the Company estimates that it is possible that the balance of UTPs could decrease in the next twelve months as a result of the effective settlement of these audits, which might involve the payment of additional taxes, the adjustment of certain deferred taxes and/or the recognition of tax benefits. It is also possible that new issues might be raised by tax authorities which might necessitate increases to the balance of UTPs. As the Company is unable to predict the timing of conclusion of these audits, the Company is unable to estimate the amount of changes to the balance of UTPs at this time.
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Year Ended December 31, | ||||||||||
2016 | 2015 | 2014 | ||||||||
Current: | ||||||||||
Federal | $ | 292.9 | $ | 278.2 | $ | 252.8 | ||||
State and Local | 39.5 | 40.1 | 70.2 | |||||||
Non-U.S. | 102.9 | 93.6 | 102.1 | |||||||
Total current | 435.3 | 411.9 | 425.1 | |||||||
Deferred: | ||||||||||
Federal | (125.8) | 14.7 | 0.9 | |||||||
State and Local | (20.3) | 7.6 | 4.9 | |||||||
Non-U.S. | (7.0) | (4.2) | 24.1 | |||||||
Total deferred | (153.1) | 18.1 | 29.9 | |||||||
Total provision for income taxes | $ | 282.2 | $ | 430.0 | $ | 455.0 |
Year Ended December 31, | |||||||
2016 | 2015 | 2014 | |||||
U.S. statutory tax rate | 35.0% | 35.0% | 35.0% | ||||
State and local taxes, net of federal tax benefit | 2.2 | 3.0 | 3.6 | ||||
Benefit of foreign operations | (13.3) | (5.8) | (7.4) | ||||
Settlement charge | 27.4 | - | - | ||||
Legacy tax items | (0.1) | (0.2) | (0.2) | ||||
Other | (0.6) | (0.8) | 0.1 | ||||
Effective tax rate | 50.6% | 31.2% | 31.1% | ||||
Income tax paid | $ | 355.7 | 397.4 | $ | 369.4 |
Year Ended December 31, | ||||||
2016 | 2015 | 2014 | ||||
United States | $ | 37.2 | $ | 913.9 | $ | 912.6 |
International | 520.8 | 465.7 | 548.4 | |||
Income before provision for income taxes | $ | 558.0 | $ | 1,379.6 | $ | 1,461.0 |
December 31, | |||||||||
2016 | 2015 | ||||||||
Deferred tax assets: | |||||||||
Current: | |||||||||
Account receivable allowances | $ | - | $ | 6.6 | |||||
Accrued compensation and benefits | - | 12.5 | |||||||
Deferred revenue | - | 8.0 | |||||||
Legal and professional fees | - | 10.7 | |||||||
Restructuring | - | 1.2 | |||||||
Other | - | 3.0 | |||||||
Total current | - | 42.0 | |||||||
Non-current: | |||||||||
Account receivable allowances | 6.0 | - | |||||||
Accumulated depreciation and amortization | 1.3 | 0.9 | |||||||
Stock-based compensation | 54.4 | 56.1 | |||||||
Accrued compensation and benefits | 119.3 | 101.6 | |||||||
Deferred rent and construction allowance | 30.1 | 28.5 | |||||||
Deferred revenue | 46.2 | 35.8 | |||||||
Foreign net operating loss (1) | 3.7 | 3.7 | |||||||
Settlement Charge | 163.2 | - | |||||||
Legal and professional fees | 4.2 | - | |||||||
Restructuring | 2.2 | - | |||||||
Uncertain tax positions | 37.3 | 38.2 | |||||||
Self-insured related reserves | 15.1 | 22.7 | |||||||
Other | 4.5 | 4.4 | |||||||
Total non-current | 487.5 | 291.9 | |||||||
Total deferred tax assets | $ | 487.5 | $ | 333.9 | |||||
Deferred tax liabilities: | |||||||||
Current: | |||||||||
Compensation and benefits | $ | - | $ | (3.0) | |||||
Unrealized gain on net investment hedges - OCI | - | (24.2) | |||||||
Other | - | (1.5) | |||||||
Total Current | - | (28.7) | |||||||
Non-current: | |||||||||
Accumulated depreciation and amortization of intangible assets and capitalized software | $ | (189.8) | $ | (178.3) | |||||
Foreign earnings to be repatriated | (7.5) | (2.9) | |||||||
Capital Gains | (24.1) | (24.7) | |||||||
Self-insured related income | (15.1) | (22.7) | |||||||
Stock based compensation | (2.9) | - | |||||||
Unrealized gain on net investment hedges - OCI | (21.0) | - | |||||||
Other liabilities | (12.1) | (5.8) | |||||||
Total non-current | (272.5) | (234.4) | |||||||
Total deferred tax liabilities | (272.5) | (263.1) | |||||||
Net deferred tax asset | 215.0 | 70.8 | |||||||
Valuation allowance | (3.2) | (4.3) | |||||||
Total net deferred tax assets | $ | 211.8 | $ | 66.5 | |||||
(1) Amounts are primarily set to expire beginning in 2018, if unused. |
Year Ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
Balance as of January 1 | $ | 203.4 | $ | 220.3 | $ | 195.6 | ||
Additions for tax positions related to the current year | 21.9 | 24.1 | 52.5 | |||||
Additions for tax positions of prior years | 12.4 | 14.0 | 8.7 | |||||
Reductions for tax positions of prior years | (27.6) | (41.6) | (31.4) | |||||
Settlements with taxing authorities | (8.3) | (7.8) | (1.8) | |||||
Lapse of statute of limitations | (2.0) | (5.6) | (3.3) | |||||
Balance as of December 31 | $ | 199.8 | $ | 203.4 | $ | 220.3 |
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NOTE 16 INDEBTEDNESS
The following table summarizes total indebtedness:
December 31, 2016 | |||||||||||||||||
Principal Amount | Fair Value of Interest Rate Swaps (1) | Unamortized (Discount) Premium | Unamortized Debt Issuance Costs (2) | Carrying Value | |||||||||||||
Notes Payable: | |||||||||||||||||
6.06% Series 2007-1 Notes due 2017 | $ | 300.0 | $ | - | $ | - | $ | - | $ | 300.0 | |||||||
5.50% 2010 Senior Notes, due 2020 | 500.0 | 5.5 | (1.3) | (1.6) | 502.6 | ||||||||||||
4.50% 2012 Senior Notes, due 2022 | 500.0 | (0.2) | (2.4) | (2.1) | 495.3 | ||||||||||||
4.875% 2013 Senior Notes, due 2024 | 500.0 | - | (2.1) | (2.7) | 495.2 | ||||||||||||
2.75% 2014 Senior Notes (5-Year), due 2019 | 450.0 | 0.9 | (0.4) | (1.7) | 448.8 | ||||||||||||
5.25% 2014 Senior Notes (30-Year), due 2044 | 600.0 | - | 3.3 | (5.9) | 597.4 | ||||||||||||
1.75% 2015 Senior Notes, due 2027 | 527.4 | - | - | (3.7) | 523.7 | ||||||||||||
Total debt | $ | 3,377.4 | $ | 6.2 | $ | (2.9) | $ | (17.7) | $ | 3,363.0 | |||||||
Current portion | (300.0) | ||||||||||||||||
Total long-term debt | $ | 3,063.0 | |||||||||||||||
December 31, 2015 | |||||||||||||||||
Principal Amount | Fair Value of Interest Rate Swaps (1) | Unamortized (Discount) Premium | Unamortized Debt Issuance Costs (2) | Carrying Value | |||||||||||||
Notes Payable: | |||||||||||||||||
6.06% Series 2007-1 Notes due 2017 | $ | 300.0 | $ | - | $ | - | $ | (0.2) | $ | 299.8 | |||||||
5.50% 2010 Senior Notes, due 2020 | 500.0 | 9.4 | (1.6) | (2.0) | 505.8 | ||||||||||||
4.50% 2012 Senior Notes, due 2022 | 500.0 | - | (2.8) | (2.5) | 494.7 | ||||||||||||
4.875% 2013 Senior Notes, due 2024 | 500.0 | - | (2.3) | (3.1) | 494.6 | ||||||||||||
2.75% 2014 Senior Notes (5-Year), due 2019 | 450.0 | 2.3 | (0.5) | (2.4) | 449.4 | ||||||||||||
5.25% 2014 Senior Notes (30-Year), due 2044 | 600.0 | - | 3.4 | (6.2) | 597.2 | ||||||||||||
1.75% 2015 Senior Notes, due 2027 | 543.1 | - | - | (4.0) | 539.1 | ||||||||||||
Total long-term debt | $ | 3,393.1 | $ | 11.7 | $ | (3.8) | $ | (20.4) | $ | 3,380.6 | |||||||
(1) The Company has entered into interest rate swaps on the 2010 Senior Notes, the 2012 Senior Notes and the 2014 Senior Notes (5-Year) which are more fully discussed in Note 5 above. | |||||||||||||||||
(2) Pursuant to ASU No. 2015-03, unamortized debt issuance costs are presented as a reduction to the carrying value of the notes payable. See Note 1 for additional discussion. |
Credit Facility
On May 11, 2015, the Company entered into a five-year senior, unsecured revolving credit facility with the capacity to borrow up to $1 billion. This replaces the $1 billion five-year 2012 Facility that was scheduled to expire in April 2017. Interest on borrowings under the facility is payable at rates that are based on the LIBOR plus a premium that can range from 79.5 basis points to 120 basis points per annum depending on the Company’s ratio of total debt to EBITDA. The Company also pays quarterly facility fees, regardless of borrowing activity under the 2015 Facility. The quarterly fees for the 2015 Facility can range from 8 basis points of the facility amount to 17.5 basis points, depending on the Company’s Debt/ EBITDA ratio. The 2015 Facility contains covenants that, among other things, restrict the ability of the Company and its subsidiaries, without the approval of lenders, to engage in mergers, consolidations, asset sales, transactions with affiliates, sale and leaseback transactions or to incur liens, as set forth in the facility agreement. The 2015 Facility also contains a financial covenant that requires the Company to maintain a Debt/EBITDA ratio of not more than 4 to 1 at the end of any fiscal quarter. Upon the occurrence of certain financial or economic events, significant corporate events or certain other events of default constituting a default under the 2015 Facility, all loans outstanding under the 2015 Facility (including accrued interest and fees payable thereunder) may be declared immediately due and payable and all lending commitments under the 2015 Facility may be terminated. In addition, certain other events of default under the 2015 Facility would automatically result in amounts outstanding becoming immediately due and payable and the termination of all lending commitments.
Commercial Paper
On August 3, 2016, the Company entered into a private placement commercial paper program under which the Company may issue CP notes up to a maximum amount of $1.0 billion. Borrowings under the CP Program are backstopped by the 2015 Facility. Amounts under the CP Program may be re-borrowed. The maturity of the CP Notes will vary, but may not exceed 397 days from the date of issue. The CP Notes are sold at a discount from par, or alternatively, sold at par and bear interest at rates that will vary based upon market conditions. The rates of interest will depend on whether the CP Notes will be a fixed or floating rate. The interest on a floating rate may be based on the following: (a) certificate of deposit rate; (b) commercial paper rate; (c) the federal funds rate; (d) the LIBOR; (e) prime rate; (f) Treasury rate; or (g) such other base rate as may be specified in a supplement to the private placement agreement. The CP Program contains certain events of default including, among other things: non-payment of principal, interest or fees; entrance into any form of moratorium; and bankruptcy and insolvency events, subject in certain instances to cure periods. The Company has not borrowed under this program through December 31, 2016. Through February 22, 2017, the Company has CP borrowings outstanding of $566.0 million with a weighted average maturity and interest rate of 63 days and 1.18%, respectively.
Notes Payable
On September 7, 2007, the Company issued and sold through a private placement transaction, $300.0 million aggregate principal amount of its 6.06% Series 2007-1 Senior Unsecured Notes due 2017 pursuant to the 2007 Agreement. The Series 2007-1 Notes have a ten-year term and bear interest at an annual rate of 6.06%, payable semi-annually on March 7 and September 7. The Company may prepay the Series 2007-1 Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make Whole Amount. The 2007 Agreement contains covenants that limit the ability of the Company, and certain of its subsidiaries to, among other things: enter into transactions with affiliates, dispose of assets, incur or create liens, enter into any sale-leaseback transactions, or merge with any other corporation or convey, transfer or lease substantially all of its assets. The Company must also not permit its Debt/EBITDA ratio to exceed 4.0 to 1.0 at the end of any fiscal quarter.
On August 19, 2010, the Company issued $500 million aggregate principal amount of senior unsecured notes in a public offering. The 2010 Senior Notes bear interest at a fixed rate of 5.50% and mature on September 1, 2020. Interest on the 2010 Senior Notes will be due semi-annually on September 1 and March 1 of each year, commencing March 1, 2011. The Company may prepay the 2010 Senior Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make-Whole Amount. Additionally, at the option of the holders of the notes, the Company may be required to purchase all or a portion of the notes upon occurrence of a “Change of Control Triggering Event,” as defined in the 2010 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2010 Indenture contains covenants that limit the ability of the Company and certain of its subsidiaries to, among other things, incur or create liens and enter into sale and leaseback transactions. In addition, the 2010 Indenture contains a covenant that limits the ability of the Company to consolidate or merge with another entity or to sell all or substantially all of its assets to another entity. The 2010 Indenture contains customary default provisions. In addition, an event of default will occur if the Company or certain of its subsidiaries fail to pay the principal of any indebtedness (as defined in the 2010 Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Company’s or certain of its subsidiaries’ indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the 2010 Indenture, the notes may become immediately due and payable either automatically or by the vote of the holders of more than 25% of the aggregate principal amount of all of the notes then outstanding.
On November 4, 2011, in connection with the acquisition of Copal, a subsidiary of the Company issued a $14.2 million non-interest bearing note to the sellers which represented a portion of the consideration transferred to acquire the Copal entities. If a seller subsequently transfers to the Company all of its shares, the Company must repay the seller its proportion of the principal on the later of (i) the fourth anniversary date of the note or (ii) within a time frame set forth in the acquisition agreement relating to the resolution of certain income tax uncertainties pertaining to the transaction. The Company has the right to offset payment of the note against certain indemnification assets associated with UTPs related to the acquisition. Accordingly, the Company has offset the liability for this note against the indemnification asset, thus no balance for this note is carried on the Company’s consolidated balance sheet at December 31, 2016 and 2015. In the event that the Company would not be required to settle amounts related to the UTPs, the Company would be required to pay the sellers the principal in accordance with the note agreement. The Company may prepay the note in accordance with certain terms set forth in the acquisition agreement.
On August 20, 2012, the Company issued $500 million aggregate principal amount of unsecured notes in a public offering. The 2012 Senior Notes bear interest at a fixed rate of 4.50% and mature on September 1, 2022. The 2012 Senior Notes also bear interest at a fixed rate of 4.5% and mature on September 1, 2022. Interest on the 2012 Senior Notes will be due semi-annually on September 1 and March 1 of each year, commencing March 1, 2013. The Company may prepay the 2012 Senior Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make-Whole Amount. Additionally, at the option of the holders of the notes, the Company may be required to purchase all or a portion of the notes upon occurrence of a “Change of Control Triggering Event,” as defined in the 2012 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2012 Indenture contains covenants that limit the ability of the Company and certain of its subsidiaries to, among other things, incur or create liens and enter into sale and leaseback transactions. In addition, the 2012 Indenture contains a covenant that limits the ability of the Company to consolidate or merge with another entity or to sell all or substantially all of its assets to another entity. The 2012 Indenture contains customary default provisions. In addition, an event of default will occur if the Company or certain of its subsidiaries fail to pay the principal of any indebtedness (as defined in the 2012 Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Company’s or certain of its subsidiaries’ indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the 2012 Indenture, the 2012 Senior notes may become immediately due and payable either automatically or by the vote of the holders of more than 25% of the aggregate principal amount of all of the notes then outstanding.
On August 12, 2013, the Company issued $500 million aggregate principal amount of senior unsecured notes in a public offering. The 2013 Senior Notes bear interest at a fixed rate of 4.875% and mature on February 15, 2024. Interest on the 2013 Senior Notes will be due semi-annually on February 15 and August 15 of each year, commencing February 15, 2014. The Company may prepay the 2013 Senior Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make-Whole Amount. Notwithstanding the immediately preceding sentence, the Company may redeem the 2013 Senior Notes, in whole or in part, at any time or from time to time on or after November 15, 2023 (three months prior to their maturity), at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding the redemption date. Additionally, at the option of the holders of the notes, the Company may be required to purchase all or a portion of the notes upon occurrence of a “Change of Control Triggering Event,” as defined in the 2013 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2013 Indenture contains covenants that limit the ability of the Company and certain of its subsidiaries to, among other things, incur or create liens and enter into sale and leaseback transactions. In addition, the 2013 Indenture contains a covenant that limits the ability of the Company to consolidate or merge with another entity or to sell all or substantially all of its assets to another entity. The 2013 Indenture contains customary default provisions. In addition, an event of default will occur if the Company or certain of its subsidiaries fail to pay the principal of any indebtedness (as defined in the 2013 Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Company’s or certain of its subsidiaries’ indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the 2013 Indenture, the 2013 Senior Notes may become immediately due and payable either automatically or by the vote of the holders of more than 25% of the aggregate principal amount of all of the notes then outstanding.
On July 16, 2014, the Company issued $300 million aggregate principal amount of senior unsecured notes in a public offering. The 2014 Senior Notes (30-year) bear interest at a fixed rate of 5.25% and mature on July 15, 2044. Interest on the 2014 Senior Notes (30-year) will be due semi-annually on January 15 and July 15 of each year, commencing January 15, 2015. The Company may prepay the 2014 Senior Notes (30-year), in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make-Whole Amount. Additionally, at the option of the holders of the notes, the Company may be required to purchase all or a portion of the notes upon occurrence of a “Change of Control Triggering Event,” as defined in the 2014 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2014 Indenture contains covenants that limit the ability of the Company and certain of its subsidiaries to, among other things, incur or create liens and enter into sale and leaseback transactions. In addition, the 2014 Indenture contains a covenant that limits the ability of the Company to consolidate or merge with another entity or to sell all or substantially all of its assets to another entity. The 2014 Indenture contains customary default provisions. In addition, an event of default will occur if the Company or certain of its subsidiaries fail to pay the principal of any indebtedness (as defined in the 2014 Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Company’s or certain of its subsidiaries’ indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the 2014 Indenture, the 2014 Senior Notes (30-year) may become immediately due and payable either automatically or by the vote of the holders of more than 25% of the aggregate principal amount of all of the notes then outstanding. On November 13, 2015, the Company issued an additional $300 million aggregate principal amount of the 2014 Senior Notes (30-year) in a public offering. This issuance constitutes an additional issuance of, and a single series with, the $300 million 2014 Senior Notes (30-year) issued on July 16, 2014 and have the same terms as the 2014 Senior Notes (30-year).
On July 16, 2014, the Company issued $450 million aggregate principal amount of senior unsecured notes in a public offering. The 2014 Senior Notes (5-year) bear interest at a fixed rate of 2.75% and mature July 15, 2019. Interest on the 2014 Senior Notes (5-year) will be due semi-annually on January 15 and July 15 of each year, commencing January 15, 2015. The Company may prepay the 2014 Senior Notes (5-year), in whole or in part, at any time at a price prior to June 15, 2019, equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make-Whole Amount. Notwithstanding the immediately preceding sentence, the Company may redeem the 2014 Senior Notes (5-year), in whole or in part, at any time or from time to time on or after June 15, 2019 (one month prior to their maturity), at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest, if any, to, but excluding the redemption date. Additionally, at the option of the holders of the notes, the Company may be required to purchase all or a portion of the notes upon occurrence of a “Change of Control Triggering Event,” as defined in the 2014 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2014 Indenture contains covenants that limit the ability of the Company and certain of its subsidiaries to, among other things, incur or create liens and enter into sale and leaseback transactions. In addition, the 2014 Indenture contains a covenant that limits the ability of the Company to consolidate or merge with another entity or to sell all or substantially all of its assets to another entity. The 2014 Indenture contains customary default provisions. In addition, an event of default will occur if the Company or certain of its subsidiaries fail to pay the principal of any indebtedness (as defined in the 2014 Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Company’s or certain of its subsidiaries’ indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the 2014 Indenture, the 2014 Senior Notes (5-year) may become immediately due and payable either automatically or by the vote of the holders of more than 25% of the aggregate principal amount of all of the notes then outstanding.
On March 9, 2015, the Company issued €500 million aggregate principal amount of senior unsecured notes in a public offering. The 2015 Senior Notes bear interest at a fixed rate of 1.75% and mature on March 9, 2027. Interest on the 2015 Senior Notes is due annually on March 9 of each year, commencing March 9, 2016. The Company may prepay the 2015 Senior Notes, in whole or in part, at any time at a price equal to 100% of the principal amount being prepaid, plus accrued and unpaid interest and a Make-Whole Amount. Additionally, at the option of the holders of the notes, the Company may be required to purchase all or a portion of the notes upon occurrence of a “Change of Control Triggering Event,” as defined in the 2015 Indenture, at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of purchase. The 2015 Indenture contains covenants that limit the ability of the Company and certain of its subsidiaries to, among other things, incur or create liens and enter into sale and leaseback transactions. In addition, the 2015 Indenture contains a covenant that limits the ability of the Company to consolidate or merge with another entity or to sell all or substantially all of its assets to another entity. The 2015 Indenture contains customary default provisions. In addition, an event of default will occur if the Company or certain of its subsidiaries fail to pay the principal of any indebtedness (as defined in the 2015 Indenture) when due at maturity in an aggregate amount of $50 million or more, or a default occurs that results in the acceleration of the maturity of the Company’s or certain of its subsidiaries’ indebtedness in an aggregate amount of $50 million or more. Upon the occurrence and during the continuation of an event of default under the 2015 Indenture, the 2015 Senior Notes may become immediately due and payable either automatically or by the vote of the holders of more than 25% of the aggregate principal amount of all of the notes then outstanding. The Company has designated €400 million of the 2015 Senior Notes as a net investment hedge as more fully discussed in Note 5.
The principal payments due on the Company’s long-term borrowings outstanding at December 31, 2016 for each of the next five years are presented in the table below:
Year Ending December 31, | Series 2007-1 Notes | 2010 Senior Notes | 2012 Senior Notes | 2013 Senior Notes | 2014 Senior Notes (5-year) | 2014 Senior Notes (30-year) | 2015 Senior Notes | Total | |||||||||||||||||||
2017 | (1) | $ | 300.0 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 300.0 | ||||||||||
2018 | - | - | - | - | - | - | - | - | |||||||||||||||||||
2019 | - | - | - | - | 450.0 | - | - | 450.0 | |||||||||||||||||||
2020 | - | 500.0 | - | - | - | - | - | 500.0 | |||||||||||||||||||
2021 | - | - | - | - | - | - | - | - | |||||||||||||||||||
Thereafter | - | - | 500.0 | 500.0 | - | 600.0 | 527.4 | 2,127.4 | |||||||||||||||||||
Total | $ | 300.0 | $ | 500.0 | $ | 500.0 | $ | 500.0 | $ | 450.0 | $ | 600.0 | $ | 527.4 | $ | 3,377.4 |
The Company entered into interest rate swaps on the 2010 Senior Notes, 2012 Senior Notes and the 2014 Senior Notes (5-year), which are more fully discussed in Note 5.
At December 31, 2016, the Company was in compliance with all covenants contained within all of the debt agreements. In addition to the covenants described above, the 2015 Facility, 2015 Senior Notes, 2014 Senior Notes (5-year), 2014 Senior Notes (30-year), the Series 2007-1 Notes, the 2010 Senior Notes, the 2012 Senior Notes and the 2013 Senior Notes contain cross default provisions. These provisions state that default under one of the aforementioned debt instruments could in turn permit lenders under other debt instruments to declare borrowings outstanding under those instruments to be immediately due and payable. As of December 31, 2016, there are no such cross defaults.
INTEREST EXPENSE, NET
The following table summarizes the components of interest as presented in the consolidated statements of operations:
Year Ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
Income | $ | 10.9 | $ | 9.7 | $ | 6.7 | ||
Expense on borrowings (a) | (141.9) | (120.6) | (118.4) | |||||
Expense on UTPs and other tax related liabilities (b) | (7.8) | (5.3) | (5.8) | |||||
Legacy Tax (c) | 0.2 | 0.7 | 0.7 | |||||
Capitalized | 0.8 | 0.4 | - | |||||
Total | $ | (137.8) | $ | (115.1) | $ | (116.8) | ||
Interest paid (d) | $ | 136.7 | $ | 108.3 | $ | 113.7 | ||
(a) Includes approximately $11 million in 2014 in net costs related to the prepayment of the Series 2005-1 Notes. | ||||||||
(b) The 2015 amount includes approximately $2 million in interest income on a tax refund and a $4 million interest reversal relating to the favorable resolution of a tax audit and an international tax audit. The 2014 amount includes a $2.0 million relating to a reversal of an interest accrual relating to the favorable resolution of an international tax matter. | ||||||||
(c) Represents a reduction of accrued interest related to the favorable resolution of Legacy Tax Matters. | ||||||||
(d) Interest paid includes net settlements on interest rate swaps more fully discussed in Note 5. |
The Company’s long-term debt is recorded at its carrying amount, which represents the issuance amount plus or minus any issuance premium or discount, except for the 2010 Senior Notes, the 2014 Senior Notes (5-Year) and the 2012 Senior Notes which are recorded at the carrying amount adjusted for the fair value of an interest rate swap used to hedge the fair value of the note. The fair value and carrying value of the Company’s long-term debt as of December 31, 2016 and 2015 are as follows:
December 31, 2016 | December 31, 2015 | ||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||
Series 2007-1 Notes | $ | 300.0 | $ | 308.9 | $ | 299.8 | $ | 320.6 | |||
2010 Senior Notes | 502.6 | 548.3 | 505.8 | 551.2 | |||||||
2012 Senior Notes | 495.3 | 535.3 | 494.7 | 530.0 | |||||||
2013 Senior Notes | 495.2 | 539.9 | 494.6 | 533.8 | |||||||
2014 Senior Notes (5-Year) | 448.8 | 456.2 | 449.4 | 454.3 | |||||||
2014 Senior Notes (30-Year) | 597.4 | 661.5 | 597.2 | 617.7 | |||||||
2015 Senior Notes | 523.7 | 534.8 | 539.1 | 520.2 | |||||||
Total | $ | 3,363.0 | $ | 3,584.9 | $ | 3,380.6 | $ | 3,527.8 |
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December 31, 2016 | |||||||||||||||||
Principal Amount | Fair Value of Interest Rate Swaps (1) | Unamortized (Discount) Premium | Unamortized Debt Issuance Costs (2) | Carrying Value | |||||||||||||
Notes Payable: | |||||||||||||||||
6.06% Series 2007-1 Notes due 2017 | $ | 300.0 | $ | - | $ | - | $ | - | $ | 300.0 | |||||||
5.50% 2010 Senior Notes, due 2020 | 500.0 | 5.5 | (1.3) | (1.6) | 502.6 | ||||||||||||
4.50% 2012 Senior Notes, due 2022 | 500.0 | (0.2) | (2.4) | (2.1) | 495.3 | ||||||||||||
4.875% 2013 Senior Notes, due 2024 | 500.0 | - | (2.1) | (2.7) | 495.2 | ||||||||||||
2.75% 2014 Senior Notes (5-Year), due 2019 | 450.0 | 0.9 | (0.4) | (1.7) | 448.8 | ||||||||||||
5.25% 2014 Senior Notes (30-Year), due 2044 | 600.0 | - | 3.3 | (5.9) | 597.4 | ||||||||||||
1.75% 2015 Senior Notes, due 2027 | 527.4 | - | - | (3.7) | 523.7 | ||||||||||||
Total debt | $ | 3,377.4 | $ | 6.2 | $ | (2.9) | $ | (17.7) | $ | 3,363.0 | |||||||
Current portion | (300.0) | ||||||||||||||||
Total long-term debt | $ | 3,063.0 | |||||||||||||||
December 31, 2015 | |||||||||||||||||
Principal Amount | Fair Value of Interest Rate Swaps (1) | Unamortized (Discount) Premium | Unamortized Debt Issuance Costs (2) | Carrying Value | |||||||||||||
Notes Payable: | |||||||||||||||||
6.06% Series 2007-1 Notes due 2017 | $ | 300.0 | $ | - | $ | - | $ | (0.2) | $ | 299.8 | |||||||
5.50% 2010 Senior Notes, due 2020 | 500.0 | 9.4 | (1.6) | (2.0) | 505.8 | ||||||||||||
4.50% 2012 Senior Notes, due 2022 | 500.0 | - | (2.8) | (2.5) | 494.7 | ||||||||||||
4.875% 2013 Senior Notes, due 2024 | 500.0 | - | (2.3) | (3.1) | 494.6 | ||||||||||||
2.75% 2014 Senior Notes (5-Year), due 2019 | 450.0 | 2.3 | (0.5) | (2.4) | 449.4 | ||||||||||||
5.25% 2014 Senior Notes (30-Year), due 2044 | 600.0 | - | 3.4 | (6.2) | 597.2 | ||||||||||||
1.75% 2015 Senior Notes, due 2027 | 543.1 | - | - | (4.0) | 539.1 | ||||||||||||
Total long-term debt | $ | 3,393.1 | $ | 11.7 | $ | (3.8) | $ | (20.4) | $ | 3,380.6 | |||||||
(1) The Company has entered into interest rate swaps on the 2010 Senior Notes, the 2012 Senior Notes and the 2014 Senior Notes (5-Year) which are more fully discussed in Note 5 above. | |||||||||||||||||
(2) Pursuant to ASU No. 2015-03, unamortized debt issuance costs are presented as a reduction to the carrying value of the notes payable. See Note 1 for additional discussion. |
Year Ending December 31, | Series 2007-1 Notes | 2010 Senior Notes | 2012 Senior Notes | 2013 Senior Notes | 2014 Senior Notes (5-year) | 2014 Senior Notes (30-year) | 2015 Senior Notes | Total | |||||||||||||||||||
2017 | (1) | $ | 300.0 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 300.0 | ||||||||||
2018 | - | - | - | - | - | - | - | - | |||||||||||||||||||
2019 | - | - | - | - | 450.0 | - | - | 450.0 | |||||||||||||||||||
2020 | - | 500.0 | - | - | - | - | - | 500.0 | |||||||||||||||||||
2021 | - | - | - | - | - | - | - | - | |||||||||||||||||||
Thereafter | - | - | 500.0 | 500.0 | - | 600.0 | 527.4 | 2,127.4 | |||||||||||||||||||
Total | $ | 300.0 | $ | 500.0 | $ | 500.0 | $ | 500.0 | $ | 450.0 | $ | 600.0 | $ | 527.4 | $ | 3,377.4 |
Year Ended December 31, | ||||||||
2016 | 2015 | 2014 | ||||||
Income | $ | 10.9 | $ | 9.7 | $ | 6.7 | ||
Expense on borrowings (a) | (141.9) | (120.6) | (118.4) | |||||
Expense on UTPs and other tax related liabilities (b) | (7.8) | (5.3) | (5.8) | |||||
Legacy Tax (c) | 0.2 | 0.7 | 0.7 | |||||
Capitalized | 0.8 | 0.4 | - | |||||
Total | $ | (137.8) | $ | (115.1) | $ | (116.8) | ||
Interest paid (d) | $ | 136.7 | $ | 108.3 | $ | 113.7 | ||
(a) Includes approximately $11 million in 2014 in net costs related to the prepayment of the Series 2005-1 Notes. | ||||||||
(b) The 2015 amount includes approximately $2 million in interest income on a tax refund and a $4 million interest reversal relating to the favorable resolution of a tax audit and an international tax audit. The 2014 amount includes a $2.0 million relating to a reversal of an interest accrual relating to the favorable resolution of an international tax matter. | ||||||||
(c) Represents a reduction of accrued interest related to the favorable resolution of Legacy Tax Matters. | ||||||||
(d) Interest paid includes net settlements on interest rate swaps more fully discussed in Note 5. |
December 31, 2016 | December 31, 2015 | ||||||||||
Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||
Series 2007-1 Notes | $ | 300.0 | $ | 308.9 | $ | 299.8 | $ | 320.6 | |||
2010 Senior Notes | 502.6 | 548.3 | 505.8 | 551.2 | |||||||
2012 Senior Notes | 495.3 | 535.3 | 494.7 | 530.0 | |||||||
2013 Senior Notes | 495.2 | 539.9 | 494.6 | 533.8 | |||||||
2014 Senior Notes (5-Year) | 448.8 | 456.2 | 449.4 | 454.3 | |||||||
2014 Senior Notes (30-Year) | 597.4 | 661.5 | 597.2 | 617.7 | |||||||
2015 Senior Notes | 523.7 | 534.8 | 539.1 | 520.2 | |||||||
Total | $ | 3,363.0 | $ | 3,584.9 | $ | 3,380.6 | $ | 3,527.8 |
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NOTE 17 CAPITAL STOCK
Authorized Capital Stock
The total number of shares of all classes of stock that the Company has authority to issue under its Restated Certificate of Incorporation is 1.02 billion shares with a par value of $0.01, of which 1.0 billion are shares of common stock, 10.0 million are shares of preferred stock and 10.0 million are shares of series common stock. The preferred stock and series common stock can be issued with varying terms, as determined by the Board.
Share Repurchase Program
The Company implemented a systematic share repurchase program in the third quarter of 2005 through an SEC Rule 10b5-1 program. Moody’s may also purchase opportunistically when conditions warrant. As a result, Moody’s share repurchase activity will continue to vary from quarter to quarter. The table below summarizes the Company’s remaining authority under its share repurchase program as of December 31, 2016:
Date Authorized | Amount Authorized | Remaining Authority | ||||
December 15, 2015 | $ | 1,000.0 | $ | 726.8 |
During 2016, Moody’s repurchased 7.7 million shares of its common stock under its share repurchase program and issued 2.8 million shares under employee stock-based compensation plans.
Dividends
The Company’s cash dividends were:
Dividends Per Share | |||||||||||||||||
Year ended December 31, | |||||||||||||||||
2016 | 2015 | 2014 | |||||||||||||||
Declared | Paid | Declared | Paid | Declared | Paid | ||||||||||||
First quarter | $ | - | $ | 0.37 | $ | - | $ | 0.34 | $ | - | $ | 0.28 | |||||
Second quarter | 0.37 | 0.37 | 0.34 | 0.34 | 0.28 | 0.28 | |||||||||||
Third quarter | 0.37 | 0.37 | 0.34 | 0.34 | 0.28 | 0.28 | |||||||||||
Fourth quarter | 0.75 | 0.37 | 0.71 | 0.34 | 0.62 | 0.28 | |||||||||||
Total | $ | 1.49 | $ | 1.48 | $ | 1.39 | $ | 1.36 | $ | 1.18 | $ | 1.12 |
On December 20, 2016, the Board approved the declaration of a quarterly dividend of $0.38 per share of Moody’s common stock, payable on March 10, 2017 to shareholders of record at the close of business on February 20, 2017. The continued payment of dividends at the rate noted above, or at all, is subject to the discretion of the Board.
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Date Authorized | Amount Authorized | Remaining Authority | ||||
December 15, 2015 | $ | 1,000.0 | $ | 726.8 |
Dividends Per Share | |||||||||||||||||
Year ended December 31, | |||||||||||||||||
2016 | 2015 | 2014 | |||||||||||||||
Declared | Paid | Declared | Paid | Declared | Paid | ||||||||||||
First quarter | $ | - | $ | 0.37 | $ | - | $ | 0.34 | $ | - | $ | 0.28 | |||||
Second quarter | 0.37 | 0.37 | 0.34 | 0.34 | 0.28 | 0.28 | |||||||||||
Third quarter | 0.37 | 0.37 | 0.34 | 0.34 | 0.28 | 0.28 | |||||||||||
Fourth quarter | 0.75 | 0.37 | 0.71 | 0.34 | 0.62 | 0.28 | |||||||||||
Total | $ | 1.49 | $ | 1.48 | $ | 1.39 | $ | 1.36 | $ | 1.18 | $ | 1.12 |
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NOTE 18 LEASE COMMITMENTS
Moody’s operates its business from various leased facilities, which are under operating leases that expire over the next 11 years. Moody’s also leases certain computer and other equipment under operating leases that expire over the next four years. Rent expense, including lease incentives, is amortized on a straight-line basis over the related lease term. Rent expense under operating leases for the years ended December 31, 2016, 2015 and 2014 was $95.4 million, $87.6 million and $83.9 million, respectively.
The 21-year operating lease for the Company’s headquarters at 7WTC which commenced on October 20, 2006 contains a total of 20 years of renewal options. These renewal options apply to both the original lease as well as additional floors leased by the Company beginning in 2014. Additionally, the 17.5 year operating lease for the Company’s London, England office which commenced on February 6, 2008 contains a total of 15 years of renewal options.
The minimum rent for operating leases at December 31, 2016 is as follows:
Year Ending December 31, | Operating Leases | ||
2017 | $ | 101.9 | |
2018 | 85.9 | ||
2019 | 75.1 | ||
2020 | 70.0 | ||
2021 | 67.2 | ||
Thereafter | 343.8 | ||
Total minimum lease payments | $ | 743.9 |
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Year Ending December 31, | Operating Leases | ||
2017 | $ | 101.9 | |
2018 | 85.9 | ||
2019 | 75.1 | ||
2020 | 70.0 | ||
2021 | 67.2 | ||
Thereafter | 343.8 | ||
Total minimum lease payments | $ | 743.9 |
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NOTE 19 CONTINGENCIES
Moody’s is involved in legal and tax proceedings, governmental investigations and inquiries, claims and litigation that are incidental to the Company’s business, including claims based on ratings assigned by MIS. Moody’s is also subject to ongoing tax audits in the normal course of business. Management periodically assesses the Company’s liabilities and contingencies in connection with these matters based upon the latest information available. Moody’s discloses material pending legal proceedings pursuant to SEC rules and other pending matters as it may determine to be appropriate.
Following the global credit crisis of 2008, MIS and other credit rating agencies have been the subject of intense scrutiny, increased regulation, ongoing inquiry and governmental investigations, and civil litigation. Legislative, regulatory and enforcement entities around the world are considering additional legislation, regulation and enforcement actions, including with respect to MIS’s compliance with regulatory standards. Moody’s periodically receives and is continuing to address subpoenas and inquiries from various governmental authorities and is responding to such investigations and inquiries.
In a letter dated September 29, 2016, the United States Department of Justice (“DOJ”) stated that it was preparing a civil complaint to be filed against Moody’s and MIS in the U.S. District Court for the District of New Jersey alleging certain violations of the Financial Institutions Reform, Recovery, and Enforcement Act in connection with the ratings MIS assigned to residential mortgage-backed securities and collateralized debt obligations in the period leading up to the 2008 financial crisis. On January 13, 2017,the Company, along with its subsidiaries MIS and MA, announced that it had entered into a settlement agreement with the United States, acting through the DOJ and the United States Attorney’s Office for the District of New Jersey, along with the States of Arizona, California, Connecticut, Delaware, Idaho, Illinois, Indiana, Iowa, Kansas, Maine, Maryland, Massachusetts, Mississippi, Missouri, New Hampshire, New Jersey, North Carolina, Oregon, Pennsylvania, South Carolina, and Washington, and the District of Columbia (collectively, the “States”), acting through their respective Attorneys General or state securities regulator, as applicable, to resolve pending and potential civil claims related to credit ratings that MIS assigned to certain structured finance instruments in the financial crisis era. The agreement also related to certain statements made in connection with Moody’s structured finance rating methodologies and procedures during the same period. Under the terms of the Settlement Agreement, the Company agreed to pay $437.5 million to the United States as a civil monetary penalty and $426.3 million in aggregate to the States. The Company also agreed to maintain a number of existing compliance measures and to implement and maintain certain additional compliance measures over the next five years. The Settlement Agreement contained no findings of violations of law by Moody’s, MIS or MA nor any admission of liability, and is final and not conditioned on court approval. The complete terms of the settlement are reflected in the settlement agreement attached as Exhibit 10.1 to the Form 8-K filed by the Company on January 17, 2017.
In addition, the Company is facing litigation from market participants relating to the performance of MIS-rated securities. Although Moody’s in the normal course experiences such litigation, the volume and cost of defending such litigation has significantly increased following the events in the U.S. subprime residential mortgage sector and global credit markets more broadly over the last decade.
For claims, litigation and proceedings and governmental investigations and inquiries not related to income taxes, where it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated, the Company records liabilities in the consolidated financial statements and periodically adjusts these as appropriate. When the reasonable estimate of the loss is within a range of amounts, the minimum amount of the range is accrued unless some higher amount within the range is a better estimate than another amount within the range. In other instances, where a loss is reasonably possible, management does not record a liability because of uncertainties related to the probable outcome and/or the amount or range of loss, but discloses the contingency if significant. As additional information becomes available, the Company adjusts its assessments and estimates of such matters accordingly. In view of the inherent difficulty of predicting the outcome of litigation, regulatory, governmental investigations and inquiries, enforcement and similar matters and contingencies, particularly where the claimants seek large or indeterminate damages or where the parties assert novel legal theories or the matters involve a large number of parties, the Company cannot predict what the eventual outcome of the pending matters will be or the timing of any resolution of such matters. The Company also cannot predict the impact (if any) that any such matters may have on how its business is conducted, on its competitive position or on its financial position, results of operations or cash flows. As the process to resolve any pending matters progresses, management will continue to review the latest information available and assess its ability to predict the outcome of such matters and the effects, if any, on its operations and financial condition. However, in light of the large or indeterminate damages sought in some such matters, the absence of similar court rulings on the theories of law asserted and uncertainties regarding apportionment of any potential damages, an estimate of the range of possible losses cannot be made at this time.
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NOTE 20 SEGMENT INFORMATION
The Company is organized into three operating segments: (i) MIS, (ii) MA and (iii) Moody’s Analytics Knowledge Services. The MAKS operating segment has been aggregated with the MA operating segment based on the fact that it has similar economic characteristics to MA. Accordingly, the Company reports in two reportable segments: MIS and MA.
In January 2014, the Company revised its operating segments to create the new Copal Amba operating segment. The new operating segment consists of all operations from Copal and the operations of Amba which was acquired in December 2013. In December 2016, the Copal Amba operating segment was rebranded as MAKS. The MAKS operating segment provides research and analytic services to the global financial and corporate sectors. The Company has determined that the MAKS and MA operating segments have similar economic characteristics as set forth in ASC 280. As such, MAKS has been combined with MA to form the MA reportable segment and revenue from MAKS is reported in the PS LOB.
The MIS segment consists of five LOBs. The CFG, SFG, FIG and PPIF LOBs generate revenue principally from fees for the assignment and ongoing monitoring of credit ratings on debt obligations and the entities that issue such obligations in markets worldwide. The MIS Other LOB primarily consists of the distribution of research and financial instruments pricing services in the Asia-Pacific region as well as ICRA non-ratings revenue.
The MA segment develops a wide range of products and services that support the risk management activities of institutional participants in global financial markets. The MA segment consists of three LOBs - RD&A, ERS and PS.
Revenue for MIS and expenses for MA include an intersegment royalty charged to MA for the rights to use and distribute content, data and products developed by MIS. The royalty rate charged by MIS approximates the fair value of the aforementioned content, data and products and is generally based on comparable market transactions. Also, revenue for MA and expenses for MIS include an intersegment fee charged to MIS from MA for certain MA products and services utilized in MIS’s ratings process. These fees charged by MA are generally equal to the costs incurred by MA to produce these products and services. Additionally, overhead costs and corporate expenses of the Company that exclusively benefit only one segment are fully charged to that segment. Overhead costs and corporate expenses of the Company that benefit both segments are allocated to each segment based on a revenue-split methodology. Accordingly, a reportable segment’s share of these costs will increase as its proportion of revenue relative to Moody’s total revenue increases. Overhead expenses include costs such as rent and occupancy, information technology and support staff such as finance, human resources and information technology. “Eliminations” in the table below represent intersegment revenue/expense. Moody’s does not report the Company’s assets by reportable segment, as this metric is not used by the chief operating decision maker to allocate resources to the segments. Consequently, it is not practical to show assets by reportable segment.
FINANCIAL INFORMATION BY SEGMENT:
The table below shows revenue, Adjusted Operating Income and operating income by reportable segment. Adjusted Operating Income is a financial metric utilized by the Company’s chief operating decision maker to assess the profitability of each reportable segment.
Year Ended December 31, | ||||||||||||||||||||||||||
2016 | 2015 | |||||||||||||||||||||||||
MIS | MA | Eliminations | Consolidated | MIS | MA | Eliminations | Consolidated | |||||||||||||||||||
Revenue | $ | 2,471.0 | $ | 1,246.9 | $ | (113.7) | $ | 3,604.2 | $ | 2,427.7 | $ | 1,163.4 | $ | (106.6) | $ | 3,484.5 | ||||||||||
Operating, SG&A | 1,115.6 | 961.1 | (113.7) | 1,963.0 | 1,120.3 | 883.9 | (106.6) | 1,897.6 | ||||||||||||||||||
Adjusted Operating Income | 1,355.4 | 285.8 | - | 1,641.2 | 1,307.4 | 279.5 | - | 1,586.9 | ||||||||||||||||||
Less:Depreciation and amortization | ||||||||||||||||||||||||||
73.8 | 52.9 | - | 126.7 | 66.0 | 47.5 | - | 113.5 | |||||||||||||||||||
Restructuring | 10.2 | 1.8 | - | 12.0 | - | - | - | - | ||||||||||||||||||
Settlement Charge | 863.8 | - | - | 863.8 | - | - | - | - | ||||||||||||||||||
Operating income | $ | 407.6 | $ | 231.1 | $ | - | $ | 638.7 | $ | 1,241.4 | $ | 232.0 | $ | - | $ | 1,473.4 | ||||||||||
Year Ended December 31, | ||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||
MIS | MA | Eliminations | Consolidated | |||||||||||||||||||||||
Revenue | $ | 2,353.4 | $ | 1,081.8 | $ | (100.9) | $ | 3,334.3 | ||||||||||||||||||
Operating, SG&A | 1,076.2 | 824.3 | (100.9) | 1,799.6 | ||||||||||||||||||||||
Adjusted Operating Income | 1,277.2 | 257.5 | - | 1,534.7 | ||||||||||||||||||||||
Less:Depreciation and amortization | 49.4 | 46.2 | - | 95.6 | ||||||||||||||||||||||
Operating income | $ | 1,227.8 | $ | 211.3 | $ | - | $ | 1,439.1 |
The cumulative restructuring charges relating to actions taken in 2016 as more fully discussed in Note 9 for the MIS and MA reportable segments are $10.2 million and $1.8 million, respectively. The charge in MA reflects cost management initiatives in certain corporate overhead functions of which a portion is allocated to MA based on a revenue-split methodology.
MIS AND MA REVENUE BY LINE OF BUSINESS
The tables below present revenue by LOB:
Year Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
MIS: | |||||||||
Corporate finance (CFG) | $ | 1,122.3 | $ | 1,112.7 | $ | 1,109.3 | |||
Structured finance (SFG) | 436.8 | 449.1 | 426.5 | ||||||
Financial institutions (FIG) | 368.9 | 365.6 | 354.7 | ||||||
Public, project and infrastructure finance (PPIF) | 412.2 | 376.4 | 357.3 | ||||||
Total ratings revenue | 2,340.2 | 2,303.8 | 2,247.8 | ||||||
MIS Other | 30.6 | 30.4 | 18.0 | ||||||
Total external revenue | 2,370.8 | 2,334.2 | 2,265.8 | ||||||
Intersegment royalty | 100.2 | 93.5 | 87.6 | ||||||
Total | 2,471.0 | 2,427.7 | 2,353.4 | ||||||
MA: | |||||||||
Research, data and analytics (RD&A) | 667.6 | 626.4 | 571.8 | ||||||
Enterprise risk solutions (ERS) | 418.8 | 374.0 | 328.5 | ||||||
Professional services (PS) | 147.0 | 149.9 | 168.2 | ||||||
Total external revenue | 1,233.4 | 1,150.3 | 1,068.5 | ||||||
Intersegment revenue | 13.5 | 13.1 | 13.3 | ||||||
Total | 1,246.9 | 1,163.4 | 1,081.8 | ||||||
Eliminations | (113.7) | (106.6) | (100.9) | ||||||
Total MCO | $ | 3,604.2 | $ | 3,484.5 | $ | 3,334.3 |
CONSOLIDATED REVENUE AND LONG-LIVED ASSETS INFORMATION BY GEOGRAPHIC AREA
Year Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
Revenue: | |||||||||
U.S. | $ | 2,105.5 | $ | 2,009.0 | $ | 1,814.5 | |||
International: | |||||||||
EMEA | 904.4 | 882.3 | 952.8 | ||||||
Asia-Pacific | 373.2 | 364.2 | 338.3 | ||||||
Americas | 221.1 | 229.0 | 228.7 | ||||||
Total International | 1,498.7 | 1,475.5 | 1,519.8 | ||||||
Total | $ | 3,604.2 | $ | 3,484.5 | $ | 3,334.3 | |||
Long-lived assets at December 31: | |||||||||
United States | $ | 681.9 | $ | 657.5 | $ | 657.6 | |||
International | 964.0 | 924.3 | 1,011.3 | ||||||
Total | $ | 1,645.9 | $ | 1,581.8 | $ | 1,668.9 |
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Year Ended December 31, | ||||||||||||||||||||||||||
2016 | 2015 | |||||||||||||||||||||||||
MIS | MA | Eliminations | Consolidated | MIS | MA | Eliminations | Consolidated | |||||||||||||||||||
Revenue | $ | 2,471.0 | $ | 1,246.9 | $ | (113.7) | $ | 3,604.2 | $ | 2,427.7 | $ | 1,163.4 | $ | (106.6) | $ | 3,484.5 | ||||||||||
Operating, SG&A | 1,115.6 | 961.1 | (113.7) | 1,963.0 | 1,120.3 | 883.9 | (106.6) | 1,897.6 | ||||||||||||||||||
Adjusted Operating Income | 1,355.4 | 285.8 | - | 1,641.2 | 1,307.4 | 279.5 | - | 1,586.9 | ||||||||||||||||||
Less:Depreciation and amortization | ||||||||||||||||||||||||||
73.8 | 52.9 | - | 126.7 | 66.0 | 47.5 | - | 113.5 | |||||||||||||||||||
Restructuring | 10.2 | 1.8 | - | 12.0 | - | - | - | - | ||||||||||||||||||
Settlement Charge | 863.8 | - | - | 863.8 | - | - | - | - | ||||||||||||||||||
Operating income | $ | 407.6 | $ | 231.1 | $ | - | $ | 638.7 | $ | 1,241.4 | $ | 232.0 | $ | - | $ | 1,473.4 | ||||||||||
Year Ended December 31, | ||||||||||||||||||||||||||
2014 | ||||||||||||||||||||||||||
MIS | MA | Eliminations | Consolidated | |||||||||||||||||||||||
Revenue | $ | 2,353.4 | $ | 1,081.8 | $ | (100.9) | $ | 3,334.3 | ||||||||||||||||||
Operating, SG&A | 1,076.2 | 824.3 | (100.9) | 1,799.6 | ||||||||||||||||||||||
Adjusted Operating Income | 1,277.2 | 257.5 | - | 1,534.7 | ||||||||||||||||||||||
Less:Depreciation and amortization | 49.4 | 46.2 | - | 95.6 | ||||||||||||||||||||||
Operating income | $ | 1,227.8 | $ | 211.3 | $ | - | $ | 1,439.1 |
Year Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
MIS: | |||||||||
Corporate finance (CFG) | $ | 1,122.3 | $ | 1,112.7 | $ | 1,109.3 | |||
Structured finance (SFG) | 436.8 | 449.1 | 426.5 | ||||||
Financial institutions (FIG) | 368.9 | 365.6 | 354.7 | ||||||
Public, project and infrastructure finance (PPIF) | 412.2 | 376.4 | 357.3 | ||||||
Total ratings revenue | 2,340.2 | 2,303.8 | 2,247.8 | ||||||
MIS Other | 30.6 | 30.4 | 18.0 | ||||||
Total external revenue | 2,370.8 | 2,334.2 | 2,265.8 | ||||||
Intersegment royalty | 100.2 | 93.5 | 87.6 | ||||||
Total | 2,471.0 | 2,427.7 | 2,353.4 | ||||||
MA: | |||||||||
Research, data and analytics (RD&A) | 667.6 | 626.4 | 571.8 | ||||||
Enterprise risk solutions (ERS) | 418.8 | 374.0 | 328.5 | ||||||
Professional services (PS) | 147.0 | 149.9 | 168.2 | ||||||
Total external revenue | 1,233.4 | 1,150.3 | 1,068.5 | ||||||
Intersegment revenue | 13.5 | 13.1 | 13.3 | ||||||
Total | 1,246.9 | 1,163.4 | 1,081.8 | ||||||
Eliminations | (113.7) | (106.6) | (100.9) | ||||||
Total MCO | $ | 3,604.2 | $ | 3,484.5 | $ | 3,334.3 |
Year Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
Revenue: | |||||||||
U.S. | $ | 2,105.5 | $ | 2,009.0 | $ | 1,814.5 | |||
International: | |||||||||
EMEA | 904.4 | 882.3 | 952.8 | ||||||
Asia-Pacific | 373.2 | 364.2 | 338.3 | ||||||
Americas | 221.1 | 229.0 | 228.7 | ||||||
Total International | 1,498.7 | 1,475.5 | 1,519.8 | ||||||
Total | $ | 3,604.2 | $ | 3,484.5 | $ | 3,334.3 | |||
Long-lived assets at December 31: | |||||||||
United States | $ | 681.9 | $ | 657.5 | $ | 657.6 | |||
International | 964.0 | 924.3 | 1,011.3 | ||||||
Total | $ | 1,645.9 | $ | 1,581.8 | $ | 1,668.9 |
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NOTE 21 VALUATION AND QUALIFYING ACCOUNTS
Accounts receivable allowances primarily represent adjustments to customer billings that are estimated when the related revenue is recognized and also represents an estimate for uncollectible accounts. Below is a summary of activity
Year Ended December 31, | Balance at Beginning of the Year | Charged to costs and expenses | Deductions (1) | Balance at End of the Year | ||||||||||
2016 | ||||||||||||||
Accounts receivable allowance | $ | (27.5) | $ | (6.2) | $ | 8.0 | $ | (25.7) | ||||||
2015 | ||||||||||||||
Accounts receivable allowance | $ | (29.4) | $ | (9.0) | $ | 10.9 | $ | (27.5) | ||||||
2014 | ||||||||||||||
Accounts receivable allowance | $ | (28.9) | $ | (8.9) | $ | 8.4 | $ | (29.4) | ||||||
(1) Reflects uncollectible amounts written off |
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Year Ended December 31, | Balance at Beginning of the Year | Charged to costs and expenses | Deductions (1) | Balance at End of the Year | ||||||||||
2016 | ||||||||||||||
Accounts receivable allowance | $ | (27.5) | $ | (6.2) | $ | 8.0 | $ | (25.7) | ||||||
2015 | ||||||||||||||
Accounts receivable allowance | $ | (29.4) | $ | (9.0) | $ | 10.9 | $ | (27.5) | ||||||
2014 | ||||||||||||||
Accounts receivable allowance | $ | (28.9) | $ | (8.9) | $ | 8.4 | $ | (29.4) | ||||||
(1) Reflects uncollectible amounts written off |
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NOTE 22 OTHER NON-OPERATING INCOME, NET
The following table summarizes the components of other non-operating income (expense), net as presented in the consolidated statements of operations:
Year Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
FX gain (a) | $ | 50.1 | $ | 1.1 | $ | 20.3 | |||
Legacy Tax (b) | 1.6 | 6.4 | 6.4 | ||||||
Joint venture income | 11.4 | 11.8 | 9.6 | ||||||
Other | (6.0) | 2.0 | (0.4) | ||||||
Total | $ | 57.1 | $ | 21.3 | $ | 35.9 | |||
(a) The FX gain in 2016 includes an approximate $35 million net gain relating to the substantial liquidation/sale of certain non-U.S. subsidiaries. Pursuant to ASC 830, cumulative translation gains relating to these subsidiaries were reclassified to other non operating income, net in the consolidated statement of operations. | |||||||||
(b) The 2016, 2015 and 2014 amount relate to the expiration of a statute of limitations for Legacy Tax Matters. |
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Year Ended December 31, | |||||||||
2016 | 2015 | 2014 | |||||||
FX gain (a) | $ | 50.1 | $ | 1.1 | $ | 20.3 | |||
Legacy Tax (b) | 1.6 | 6.4 | 6.4 | ||||||
Joint venture income | 11.4 | 11.8 | 9.6 | ||||||
Other | (6.0) | 2.0 | (0.4) | ||||||
Total | $ | 57.1 | $ | 21.3 | $ | 35.9 | |||
(a) The FX gain in 2016 includes an approximate $35 million net gain relating to the substantial liquidation/sale of certain non-U.S. subsidiaries. Pursuant to ASC 830, cumulative translation gains relating to these subsidiaries were reclassified to other non operating income, net in the consolidated statement of operations. | |||||||||
(b) The 2016, 2015 and 2014 amount relate to the expiration of a statute of limitations for Legacy Tax Matters. |
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NOTE 23 RELATED PARTY TRANSACTIONS
Moody’s Corporation made grants of $4 million to The Moody’s Foundation during each of the years ended December 31, 2016 and 2014. The Company did not make a grant to the Foundation in 2015. The Foundation carries out philanthropic activities primarily in the areas of education and health and human services. Certain members of Moody’s senior management are on the board of the Foundation.
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NOTE 24 QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended | |||||||||||||
(amounts in millions, except EPS) | March 31 | June 30 | September 30 | December 31 | |||||||||
2016 | |||||||||||||
Revenue | $ | 816.1 | $ | 928.9 | $ | 917.1 | $ | 942.1 | |||||
Operating income (loss) | $ | 304.1 | $ | 410.2 | $ | 397.5 | $ | (473.1) | |||||
Net income (loss) attributable to Moody's | $ | 184.4 | $ | 255.5 | $ | 255.3 | $ | (428.6) | |||||
EPS: | |||||||||||||
Basic | $ | 0.95 | $ | 1.32 | $ | 1.33 | $ | (2.25) | |||||
Diluted | $ | 0.93 | $ | 1.30 | $ | 1.31 | $ | (2.25) | |||||
2015 | |||||||||||||
Revenue | $ | 865.6 | $ | 918.1 | $ | 834.9 | $ | 865.9 | |||||
Operating income | $ | 371.3 | $ | 419.3 | $ | 349.7 | $ | 333.1 | |||||
Net income attributable to Moody's | $ | 230.1 | $ | 261.7 | $ | 231.6 | $ | 217.9 | |||||
EPS: | |||||||||||||
Basic | $ | 1.14 | $ | 1.30 | $ | 1.16 | $ | 1.11 | |||||
Diluted | $ | 1.11 | $ | 1.28 | $ | 1.14 | $ | 1.09 |
Basic and diluted EPS are computed for each of the periods presented. The number of weighted average shares outstanding changes as common shares are issued pursuant to employee stock-based compensation plans and for other purposes or as shares are repurchased. Therefore, the sum of basic and diluted EPS for each of the four quarters may not equal the full year basic and diluted EPS.
Both the operating loss and the net loss attributable to Moody’s in the three months ended December 31, 2016 primarily reflect the Settlement Charge of $863.8 million ($700.7 million, net-of-tax) as more fully discussed in Note 19. There were benefits of $1.6 million and $6.4 million to net income related to the resolution of Legacy Tax Matters for year ended December 31, 2016 and 2015.
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Three Months Ended | |||||||||||||
(amounts in millions, except EPS) | March 31 | June 30 | September 30 | December 31 | |||||||||
2016 | |||||||||||||
Revenue | $ | 816.1 | $ | 928.9 | $ | 917.1 | $ | 942.1 | |||||
Operating income (loss) | $ | 304.1 | $ | 410.2 | $ | 397.5 | $ | (473.1) | |||||
Net income (loss) attributable to Moody's | $ | 184.4 | $ | 255.5 | $ | 255.3 | $ | (428.6) | |||||
EPS: | |||||||||||||
Basic | $ | 0.95 | $ | 1.32 | $ | 1.33 | $ | (2.25) | |||||
Diluted | $ | 0.93 | $ | 1.30 | $ | 1.31 | $ | (2.25) | |||||
2015 | |||||||||||||
Revenue | $ | 865.6 | $ | 918.1 | $ | 834.9 | $ | 865.9 | |||||
Operating income | $ | 371.3 | $ | 419.3 | $ | 349.7 | $ | 333.1 | |||||
Net income attributable to Moody's | $ | 230.1 | $ | 261.7 | $ | 231.6 | $ | 217.9 | |||||
EPS: | |||||||||||||
Basic | $ | 1.14 | $ | 1.30 | $ | 1.16 | $ | 1.11 | |||||
Diluted | $ | 1.11 | $ | 1.28 | $ | 1.14 | $ | 1.09 |
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On February 16, 2017, the Company notified the holders of the Series 2007-1 Notes that it intends to prepay the notes on March 20, 2017 in accordance with provisions set forth in the 2007 Agreement. Accordingly, the Company will make cash payments to the holders of the Series 2007-1 Notes totaling approximately $316 million in the first quarter of 2017 (payment consists of $300 million of principal, $8 million in accrued interest, and approximately $8 million in pre-payment penalties).
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